Small Business, Big Ambitions

Hubspot

Founded in 2006 by Brian Halligan and Dharmesh Shan while attending MIT, Hubspot is a leading customer relationship management platform designed for scaling companies of all sizes. Hubspot has grown into a global leader in the SaaS industry, helping businesses attract, retain, and engage their customers. Hubspot initially focused on inbound marketing but has since expanded its product offering to sales, customer service, and content management. 

Today, Hubspot serves over 238k customers across 130 countries, enabling them to generate over $2 billion in revenues with margins of 16%. Hubspot competes with other CRM giants like Salesforce, Marketo, and Microsoft, however, its differentiation is in its easy-to-use interface, pricing models, AI tools, and ability to enable businesses of all sizes. Hubspot’s main mission is to help companies “Grow Better” by giving them the tools to deliver value across the customer lifecycle. 

Azar Capital Group believes there is significant long-term value in Hubspot that has yet to be found. The company has consistently been able to identify customer wants and needs to create strong barriers to entry making it hard for the rest of the industry to keep up. Hubspot’s strong balance sheet has enabled remain focused on its clients' needs during tough macroeconomic trends. 

Hubspot has consistently been able to demonstrate its growth through its financial statements showing the ever-increasing demand for its CRM products. In their most recent quarter, they reported a revenue of $669 million which represents a 20% year-over-year increase driven by subscription revenue. During this time Hubspot was able to report a net income of $8.1 million which is a significant increase from last year when the reported a loss of $3.6 million.

Hubspot is currently trading at a premium compared to some of its industry counterparts, with a current PE ratio of 85 compared to the industry average of 60-65x investors remain confident in the company's ability to continue to grow. Similarly, its price-to-book ratio exceeds the sector benchmark several times, showing the market's favorable view of the company's assets and future scalability. 

The company also reported a strong liquidity position of $2.1 billion in cash, as of September 30th, 2024. This will enable them to be flexible in the short and long term with future investments and potential acquisitions. Whilst reporting a customer base of 238,128 a 23% YoY increase, Hubspot reported a decreased revenue per customer from the year prior. In summary, Hubspot’s financial performance shows its ability to balance high growth while improving operational efficiency. 

Customer relationship management and software as a service represent the largest-growing industry and are expected to grow annually by 13% through 2030. This growth is driven by the ongoing transformation of businesses globally from the increased demand for cloud-based solutions and rising demand for AI-driven automation. Operating in a highly competitive industry, Hubspot can offer small and large businesses a wide range of products. With an early entrance to the market, Hubspot has been able to scale and integrate its business around customer needs which has made it a go-to company for businesses looking for CRM solutions. 

Hubspot competes against well-established CRM and SaaS players, including Salesforce, Zoho, Adobe’s Marketo, and Mailchimp. Currently, Salesforce leads the overall CRM market with a market share of over 20%, although Hubspot has been able to carve out a strong niche within the mid-market and SMB segments. Hubspot users have been loyal to the company because they have continued to bring new products and created an easy-to-use and cost-effective solution that provides them a clear advantage over their competitors. 

Hubspot has been able to create barriers of entry and a moat around them that has been able to help differentiate themselves and maintain market share. Hubspot has been able to offer its users a highly integrative platform, AI, and automation tools, with a customer-centric approach. The company's ability to help its customers with easy-to-use tools for marketing, sales, and customer service has helped them create a strong brand and community making them difficult to replace. 

Hubspot growth is highly directly related to their ability to attract and maintain its customer base. In their most recent year, they reported a growth of 20%. Hubspot’s main source of revenue comes from their customer recurring subscriptions, representing 97% of the company's total revenue. Hubspot has begun to invest significantly in incorporating AI and ML into its platform as well as expanding its geological footprint. If the company is successfully able to make an entrance into the Asia and Latin American markets it could see significant growth in the long term. 

With a strong balance sheet and a cash balance of just over $2 billion, this puts Hubspot in a good position to grow from inorganic methods such as M&A and strategic partnerships. In 2021 Hubspot acquired ‘The Hustle’ to boost the company's content marketing and thought leadership capabilities. Furthermore, Hubspot could acquire smaller SaaS companies that are aligned with the company's goals, potential targets could include firms that specialize in niche CRM or AI-driven analytical tools. The firm could also build strategic partnerships with cloud platforms enabling them to enhance its scalability and reach.

Many factors could drive Hubspot’s growth in the near term including the adoption of generative AI into their products, customer retention, market expansion, and upselling to enterprises. There is also an ongoing shift to a digital-first model across industries, Hubspot's focus on SMBs and scalable solutions put them in a good position to capture the continued demand.  Additionally, Hubspot launched ‘Operations Hub’ in 2021 which was their first step to create an automated CRM and its ability to integrate with third-party tools, making it more appealing to scaling businesses. 

Looking ahead, there are several initiatives that Hubspot has been working on to sustain their growth like an increased developer ecosystem and a deeper verticalization for industry-specific needs. If Hubspot can tailor its product offerings to specific needs for customers like healthcare, education, and e-commerce, it could tap into new customer segments. The expansion of Hubspot’s App Marketplace and partnerships enable third-party developers to create tools to strengthen the company's versatility and stickiness. 

Operating in a very dynamic and competitive market where opportunities are abundant, Hubspot faces many risks around its operational abilities, valuation, and risks around regulations and compliances. Hubspot also faces the challenges that global organizations face with managing a global workforce of over 8000 employees. If Hubspot were to delay or fail to deliver new products for their users, could lead to customer churn or erode their competitiveness. 

The SaaS industry is highly impacted by regulations from data privacy, cybersecurity, and artificial intelligence. Spanning 135 countries, Hubspot must comply with a diverse set of regulations like CCPA and GDPR. Economic downturns or reduced tech spending could impact the demand for their products, particularly amongst their core user base. 

Hubspot valuation leaves them with little room for any missteps or failure to execute as they are trading at values above their competitors. While the company does have a strong growth trajectory with its current multiples any slowdown could lead to a significant drop in their stock price. The company's growth assumptions include its ability to expand its geographical footprint and continued demand. The company's ability to proactively address risks will be critical for their ability to grow and maintain their competitive edge. 

Hubspot is a leader in the SMB focused CRM and SaaS market, driven by their ability to innovate their products with AI and a customer-driven focus. With a global footprint and a strong cash flow, the company has consistently been able to differentiate itself from its competitors. However, Hubspot faces stiff competition with firms like Salesforce and Microsoft Dynamics, and pricing pressures have reflected in a decline in average revenue per customer while seeing an increase in total customers. 

Azar Capital Group believes that Hubspot is well positioned from its strong market position and consistent growth making it an attractive investment opportunity for long-term growth. The company has been able to deliver meaningful AI automation tools along with high personalization features. Additionally, Hubspot’s ability to monitor SMB health and spending will provide valuable insights into the company's core market resilience. Finally, The Bad Boys over at Azar Capital Group think that Hubspot is a BUY for long-term investors who seek exposure to a growing SaaS company with a robust suite of products and a strong competitive edge. 

Disclosure

This analysis is for informational purposes only and should not be considered financial advice. Investors are encouraged to perform their own due diligence or consult with a financial advisor before making investment decisions.