HubSpot (HUBS 0.80%), a provider of cloud-based customer relationship management (CRM) and marketing services, went public at $25 on Oct. 9, 2014. Its shares now trade at about $632, so a $2,000 investment in its IPO would be worth more than $50,500 today.
The same investment in an S&P 500 index fund would only have grown to $5,400. Let's see why HubSpot easily beat the market -- and whether it still has more room to run.
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What does HubSpot do?
HubSpot's cloud-based CRM platform makes it easier for companies to store, organize, and analyze their information for individual customers. It also provides search engine optimization (SEO) tools, lead generation tools, and a marketing platform for creating lower-cost "inbound" strategies -- such as social media campaigns, viral videos, and blogs -- that drive customers to proactively seek out businesses' brands.
HubSpot is a lot smaller than Salesforce, which controls more than one-fifth of the CRM market, as well as other major players like Microsoft, Oracle, SAP, and Adobe. However, HubSpot mainly targets smaller businesses with a simpler platform, while its larger CRM peers focus on enterprise customers. HubSpot also provides its CRM platform as a free service to tether more customers to its paid marketing and analytics services.
How fast is HubSpot growing?
HubSpot's focus on smaller customers has paid off in spades over the past decade. From 2014 to 2023, its revenue increased at a compound annual growth rate (CAGR) of 38% as its number of customers rose from 13,607 to 205,091. Its adjusted operating margin expanded from negative 27.7% in 2014 to positive 15.2% in 2023.
But just like Salesforce, HubSpot's growth cooled off over the past few years as macroeconomic headwinds drove many companies to rein in their software spending. Its revenue climbed 33% in 2022 and 25% in 2023, but it expects just 18% growth in 2024, with roughly 1 percentage point of that coming from its recent acquisition of Clearbit.
During HubSpot's latest conference call, CFO Kate Bueker said the company was still "assuming that the macro conditions remain challenging into 2024" as its customers "continue to optimize" their cloud spending. To cope with that slowdown, it recently launched more tiers of paid seats between its starter, pro, and enterprise tiers to attract a wider range of customers. It's also been rolling out new artificial intelligence (AI) tools for generating digital content, creating customer service chatbots, summarizing calls and emails, analyzing data, and optimizing marketing campaigns.
To balance those investments with its slower sales, HubSpot laid off hundreds of employees over the past year. That's why it expects its adjusted operating margin to expand to a midpoint of 16% in 2024 as its adjusted EPS rises 16% to 18%.
But based on the midpoint of that forecast, HubSpot shares are valued at 92 times this year's earnings. That makes it a lot pricier than Salesforce, which is growing its earnings at a comparable rate but trades at just 31 times forward earnings.
Does HubSpot still have room to run?
In 2025, analysts expect HubSpot's revenue and adjusted EPS to rise 19% and 21%, respectively. Those growth rates are healthy, but they could fail to support its premium valuation, which was likely inflated by the broader rally in AI stocks and investors' hopes for lower interest rates. It's also still unprofitable on a generally accepted accounting principles (GAAP) basis and was shouldering a debt-to-equity ratio of 1.3 at the end of 2023.
HubSpot's high valuation, red ink, and imperfect balance sheet could limit its gains this year, especially if the bulls shift away from AI stocks and interest rates remain elevated. That's probably why its insiders sold more than twice as many shares as they bought over the past 12 months. HubSpot's stock might head higher over the long term, but all of these challenges could limit its near- to mid-term gains.
