Shares of customer relationship management software provider HubSpot (HUBS -0.78%) have doubled since bottoming out at the beginning of 2023. However, the story becomes more muddled if you zoom out a bit. Even after this momentous rally, HubSpot stock is still down 30% from its pandemic-era high.
HubSpot's revenue growth rate has slowed since the days of the pandemic, but the company is still growing at an impressive rate, given its size. Revenue jumped 24% year over year in the fourth quarter of 2023, and the company expects its annual revenue this year to rise by 18% and surpass $2.5 billion. Against the backdrop of an uncertain economic environment, HubSpot's results look impressive.
HubSpot is having trouble in one key area
A software-as-a-service (SaaS) company like HubSpot grows in two ways: winning new customers, and convincing existing customers to spend more. HubSpot is having no trouble at all winning new customers. The company ended 2023 with 205,091 customers, up 23% from the end of 2022.
The problem is that HubSpot is struggling to grow spending with existing customers. Average subscription revenue per customer in the fourth quarter grew by just 1% year over year to $11,365. This is despite HubSpot's platform being tailor made for a land-and-expand strategy.
HubSpot splits its platform into "hubs," each with a different area of focus. Marketing has its own hub, as does sales, customer service, content management, operations, and commerce. Within each hub, pricing is determined by a variety of factors. Most hubs have multiple tiers, and pricing rises with the number of marketing contacts or paid users, depending on the hub.
One complication of HubSpot's current pricing model is the distinction between paid users and free users. Even for customers on the priciest professional and enterprise plans, many features are accessible to any number of free users. A team of 100 employees using HubSpot's platform, for example, could only have a handful of paid users. HubSpot's revenue for most of its hubs is based on the paid user count.
A new pricing model could help
The company plans to roll out a new pricing model in March that simplifies this situation and potentially raises prices for customers. Outside the free plan, every active user with edit access will require a paid seat. There are free view-only seats that can see information but not change it, core seats that allow for editing, and specialized seats that unlock additional functionality. Free users will be far more limited than they are under the current model.
The new model will only apply to new users at first, with existing users brought on in waves through 2025. HubSpot is limiting the cost increase upon the first renewal to 5%, giving customers time to adjust to the new model without seeing a big increase in their bills right away.
Because of this slow, cautious rollout, any positive impact on HubSpot's revenue likely won't show up until 2025 at the earliest.
Is HubSpot stock a buy?
The new pricing model will likely provide a boost to average spending per customer over the next couple of years, although the effect won't be immediate. The new model also removes some minimum seat requirements on certain plans, which may make it easier for some potential customers to adopt the platform.
An acceleration in growth would be good news for investors, but it may not be enough to propel HubSpot stock higher. With the company expecting to produce adjusted earnings per share (EPS) between $6.86 and $6.94 this year, HubSpot stock trades for about 85 times forward earnings.
Even if the macroeconomic environment improves and this new pricing model pays off, it will be tough for HubSpot to grow quickly enough to justify this valuation. At the right price, HubSpot could be a great long-term investment as the company gains share in the CRM software market. But to me, the stock appears far too expensive to seriously consider.
