Investors in inbound marketing company HubSpot (HUBS -0.78%) have watched the stock rise this year. After a brutal sell-off in 2022, the stock staged a dramatic recovery this year. While not near its peak in 2021, it is still up 70% for the year after pulling back over the last few weeks.
However, those movements may leave investors wondering how to approach the Software-as-a-Service (SaaS) stock. Is it headed back to its all-time high, or is it done moving higher for the foreseeable future?
Ultimately, we do not know the answer to that question, but a closer look at the company may help investors gauge the likelihood of continued growth.
How HubSpot competes
HubSpot was born of a desire to help customers rather than harass them. To that end, it developed an inbound marketing tool to reach customers through content creation and information sharing rather than more traditional sales pitches.
Through that strategy, it built a customer relationship management (CRM) tool that offers "freemium" content that has attracted customers, particularly small and medium-sized businesses (SMBs). Such an approach sets it apart from CRM-giant Salesforce and other competitors.
Like Salesforce and other peers, HubSpot leverages AI to employ these strategies. Its content assistant helps customers write content for inbound marketing purposes. Moreover, ChatSpot.ai performs tasks by using a natural language model. Building customer lists, writing sales emails, and creating reports are among its functions.
Admittedly, such an approach comes with risks. SMBs face considerable challenges in this uncertain economy, a factor that could negatively affect HubSpot.
Additionally, its tools ultimately need to produce high-quality content that helps customers. If it generates content not of interest, it could betray its mission to help consumers rather than badgering the customers HubSpot's clients want to reach.
Where HubSpot stands financially
Fortunately for HubSpot, the numbers indicate that the company has its eye on the ball. The company now claims almost 185,000 customers as of the end of the second quarter of 2023, 23% more than in the year-ago quarter. That led to more than $1 billion in revenue during the first half of 2023, a yearly increase of 26%.
However, HubSpot spent heavily on research and development and sales and marketing during that period. It also dealt with restructuring charges in both quarters. Consequently, that led to higher operating losses and a generally accepted accounting principles (GAAP) net loss of $157 million in the first six months of 2023. The company lost $66 million during the same period last year.
Still, HubSpot expects its revenue growth to continue. If that prediction holds, the 2023 forecast of over $2.1 billion means a 25% yearly increase. Also, with approximately $1.5 billion in liquidity, it can forgo profitability for a few years while it invests in its business.
With its progress, the rising stock price resulted in a price-to-sales (P/S) ratio of 12. While that is double Salesforce's sales multiple of 6, HubSpot's 26% revenue growth rate for the first half of 2023 is more than double Salesforce's 12% revenue increase. That differential could make HubSpot more appealing despite the higher P/S ratio.
Making sense of HubSpot stock
Considering the state of HubSpot, one can likely profit in the long term by adding shares at current price levels. Indeed, it is not the bargain it was in January, and the continuing losses will rightly concern some investors.
Nonetheless, HubSpot's robust balance sheet is able to sustain losses. Additionally, its inbound marketing approach and relationship with SMBs should build a sustainable niche that ultimately profits its customers and, eventually, the company's shareholders.
