Outside of the world of Internet marketing, Hubspot is a little known company founded in 2006 by Brian Halligan and Dharmesh Shah. It is a pioneer in field of Inbound marketing, that is SEO, content management, social media marketing, videos and others. Started out of MIT, HUBS later received venture funding from Sequoia Capital, Google Ventures, Fidelity and SalesForce.
HubSpot is a software for companies and marketing agencies, which helps devise a low-cost, modern and aimed marketing strategy. According to the company, customers no longer respond to traditional advertisements (TV, newspaper, display ads) or e-mail campaigns, instead look for opinions on products or google or social media. Their site and blogs attract 1.5 million unique visitors every month, with more than 2 million followers across Facebook, Linkedin and Twitter. Basically, they do what they say and get most customers through inbound marketing.
Their estimated market is 3 million businesses in USA and EU, which have a web presence, while only 3% of them rely on modern marketing methods. As such, it is only at the beginning although it has already become a standard in marketing agencies (over 2200 already use it). Although the software has scale, HubSpot focuses on small and medium sized businesses (20 - 2000 employees), where it believes it has a competitive advantage and can offer the best product. According to several software review sites, they are no.1 in SEO (Search engine optimization), marketing automation and social media marketing.
Let's take a look at some numbers:
HubSpot is a software for companies and marketing agencies, which helps devise a low-cost, modern and aimed marketing strategy. According to the company, customers no longer respond to traditional advertisements (TV, newspaper, display ads) or e-mail campaigns, instead look for opinions on products or google or social media. Their site and blogs attract 1.5 million unique visitors every month, with more than 2 million followers across Facebook, Linkedin and Twitter. Basically, they do what they say and get most customers through inbound marketing.
Their estimated market is 3 million businesses in USA and EU, which have a web presence, while only 3% of them rely on modern marketing methods. As such, it is only at the beginning although it has already become a standard in marketing agencies (over 2200 already use it). Although the software has scale, HubSpot focuses on small and medium sized businesses (20 - 2000 employees), where it believes it has a competitive advantage and can offer the best product. According to several software review sites, they are no.1 in SEO (Search engine optimization), marketing automation and social media marketing.
Let's take a look at some numbers:
Hubspot 5- year financials
It is clear that HUBS is growing and it appears to be slowing down, however in last 3 quarters it gained momentum and revenue growth accelerated to 51%, 53% and 58%. Total number of customers grew 35% to 14 746, beating Q4 growth by 4%. Company is showing a loss like many other SaaS (Software as a service) companies, it's operating cash flow is also negative. What does it mean? A part of it's growth still comes from financing, Hubspot does not generate enough cash to fund all the expenses associated with expansion. You might look at it in a negative way, but from the view of Hubspot and it's management, they are using all cash that is available to fund expansion, growth, and brand awareness, what I believe is a smart thing to do at this stage. Closest competitor Marketo (MKTO) has only 1/4 of HUBS user base and grew 43% in latest quarter.
Valuation
Hubspot is trading at 12.5 times trailing 12-month, which is about the only metric that can be used, as it does not generate earnings or net cash flow. As many other momentum stocks, it is difficult to value. Let us assume, that Hubspot can achieve 15% net profit margins, 30% annual revenue growth for next 5 years, and 15% growth for years 6-10. Using a discount rate of 8%, I arrived at a DCF value of $1.9 billion, or around 20% higher than current price. These assumptions are very rough estimates, as the profit margin might be too high, or growth underestimated.
I am buying HUBS because of the company's potential, clear leadership in industry, and stock's momentum. Yes the valuation is rich and expectations are high, but I think not so many market participants realize it. Salesforce (CRM) was an early investor in HUBS and offered to buy the company for $1 billion in 2013, however Hubspot's management declined the offer.
A stop loss is set like on every purchase I make. Growth stocks can fly for years, but when they start to fall, it's very quick and painful. Like they say, hope for the best, but prepare for worst. Good luck in investing!
Valuation
Hubspot is trading at 12.5 times trailing 12-month, which is about the only metric that can be used, as it does not generate earnings or net cash flow. As many other momentum stocks, it is difficult to value. Let us assume, that Hubspot can achieve 15% net profit margins, 30% annual revenue growth for next 5 years, and 15% growth for years 6-10. Using a discount rate of 8%, I arrived at a DCF value of $1.9 billion, or around 20% higher than current price. These assumptions are very rough estimates, as the profit margin might be too high, or growth underestimated.
I am buying HUBS because of the company's potential, clear leadership in industry, and stock's momentum. Yes the valuation is rich and expectations are high, but I think not so many market participants realize it. Salesforce (CRM) was an early investor in HUBS and offered to buy the company for $1 billion in 2013, however Hubspot's management declined the offer.
A stop loss is set like on every purchase I make. Growth stocks can fly for years, but when they start to fall, it's very quick and painful. Like they say, hope for the best, but prepare for worst. Good luck in investing!
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