Artificial intelligence (AI) is quietly weaving its way into our daily lives. Goldman Sachs estimates that 9.2% of U.S. companies now use AI to produce goods and services, twice the number using the technology at the same time last year. And Morgan Stanley estimates that AI software sales will increase by 580% over the next three years, topping $400 billion in 2028.
AppLovin (APP 0.20%) and HubSpot (HUBS 2.47%) are likely to benefit from that trend, and most Wall Street analysts see substantial upside in the stocks, as detailed below:
- Among 31 analysts that follow AppLovin, the median target price is $470 per share. That implies 29% upside from its current share price of $364.
- Among 38 analysts that follow HubSpot, the median target price is $750 per share. That implies 38% upside from its current share price of $542.
Here's what investors should know about these software companies.
Image source: Getty Images.
1. AppLovin
AppLovin develops adtech software. For years, the company has focused on helping game developers market and monetize their applications, but it has recently introduced adtech software designed for e-commerce brands. Its platform features a targeting engine called Axon that uses artificial intelligence to match advertiser demand with publisher supply across connected TV and mobile devices.
Morgan Stanley recently selected AppLovin as one of the companies best positioned to benefit from growing AI software spending. The analysts called Axon a "best in class machine learning ad engine," saying it has delivered superior return on ad spend for brands on the platform. The report also highlighted AppLovin's in-house creative agency, SparkLabs, which uses generative AI to develop ad content.
AppLovin reported excellent first-quarter financial results. Total revenue increased 40% to $1.4 billion, as strong sales growth in the advertising segment offset a decline in the mobile games segment. Meanwhile, generally accepted accounting principles (GAAP) earnings climbed 149% to $1.67 per diluted share. And management guided for 69% advertising sales growth in the second quarter.
Wall Street estimates that AppLovin's earnings will increase by 55% annually through 2026. That makes the current valuation of 66 times earnings look reasonable, especially since the company beat the consensus estimate by an average of 27% over the last four quarters. Patient investors should feel comfortable buying a small position today.
2. HubSpot
HubSpot develops customer relationship management (CRM) software. Its platform comprises productivity applications for marketing, sales, customer service, and operations teams. It also includes solutions for content management and payments. HubSpot's focus on mid-market businesses (defined as those with 2 to 2,000 employees) differentiates it from industry leader Salesforce, which has designed its platform for large enterprises.
HubSpot has embedded its platform with an AI engine called Breeze. It can summarize CRM records, draft emails, create webpages, generate social media posts, and provide customer support. It can also analyze information, surface insights, and make recommendations that improve efficiency across sales, marketing, and customer service workflows.
HubSpot reported mixed first-quarter financial results due to the macroeconomic uncertainty created by tariffs. Customers climbed 19%, but the average existing customer spent 4% less. In turn, revenue increased 16% to $714 million, but non-GAAP net income increased just 6% to $1.78 per diluted share, as operating margin contracted due to ongoing investments in product development.
Management provided positive updates on AI adoption on the earnings call. "Over the past year, Content Hub attach rates have tripled and Service Hub adoption has improved because of embedded AI," according to CEO Yamini Rangan. She also told analysts that the number of businesses engaging with Breeze Copilot more than doubled compared to the previous quarter.
Wall Street estimates that HubSpot's adjusted earnings will increase by 19% annually through 2026. That makes the current valuation of 66 times adjusted earnings look expensive. But I think earnings could grow more quickly. HubSpot exceeded the consensus estimate by an average of 10% in the last four quarters, and the company could continue to beat estimates as it monetizes new AI features. Investors should consider buying a very small position today.
