Buy HubSpot (HUBS) stock for the long term.
– Build a long position below $75. Add moderately on a pullback into the $70 to $71 area and aggressively in the $64 to $68 range. (Published Sept. 24, 2017)
The Industry Opportunity
Cold calls? Hate ‘em. Straight to voicemail if I don’t recognize the phone number.
TV ads? DVR and fast forward through them or use a streaming service and skip them altogether.
Direct mail? Direct into the trash.
Spam email? Delete without opening.
Technology and the internet of things has made it more difficult for companies to reach consumers via traditional marketing. Consumers don’t tolerate the hard push or the shady sales pitch. The customer wants to be the focus and that requires a change of marketing strategy. The solution to this problem unearths a $45 billion market. A $28 billion subset of this market, referred to as inbound content marketing, is when a consumer hunts for more information about a company or product based on an article.
This is a simplified version of the idea behind the inbound process. Offer information or solutions for a customer and they will find a way to you. The more helpful the content, the more likely they are to transact business with you. Traditional marketing offers no content and will continue to wane in its success rates because of the lack of content.
This is a problem that HubSpot is helping companies all over the world to solve via inbound marketing. The aim of inbound marketing is to lead consumers naturally to products that solve their problems and meet their needs. HubSpot’s manages the entire process through a cloud-based platform. HubSpot offers cloud-based software that helps companies to make better use of SEO, blogging and social media platforms as a way to reach consumers. The idea is that, by maximizing your presence in these new arenas, new customers will actively search for you.
What HUBS Does
HubSpot is an inbound marketing and sales growth stack. The growth stack consists of three segments: marketing, sales and customer relationship management (CRM). All three platforms are free to start and users can integrate right out of the box. Marketing includes social media publishing and monitoring, blogging, SEO, website content management, e-mail marketing, marketing automation and reporting/analytics. HubSpot Sales enables sales and service teams to have more effective conversations with leads, prospects and customers. HubSpot CRM helps sales teams organize, track and grow their pipeline.
The idea of the freemium service is to allow customers to try out the base platform with the goal of upselling So far, management has indicated several new clients have been obtained via the freemium offer. HubSpot doesn’t just sell software. It sells the entire movement of inbound marketing and the idea that business is about relationships, not just making a sale.
The Uncommon Market Position That Sets HubSpot Apart
HubSpot practices what it sells. The company uses a light-touch service, so customers don’t need to interact with a HUBS rep in order to subscribe to the platform. That hasn’t slowed business nor the rollover of new software to propel HubStop ahead of competition.
Recently, the company announced the launch of Content Strategy, a tool that helps marketers discover and validate topics to write about that match the way people currently search and buy. This new approach will contrast with the previous method organizations used to gain a spot at the top of search queries, like those on Google. Previously, the focus was on creating multiple pieces of content focused on niche, long-tail keywords. As search engines have evolved, the functionality and success of specific keywords has declined.
The key for Content Strategy is a new topic-based model on creating content called topic clustering. This approach helps marketers drive more traffic and also serves the search engine with better information architecture and more content the crawler can index. It helps provide stronger results for those searching and also for the marketers that create content.
The company states that by combining machine learning and hard data, Content Strategy empowers marketers to deliver better results and more traffic with more high-quality, targeted content. Most SEO tools today focus on the technical aspects of SEO, but don’t give marketers the tools to discover new topics to write about and build and structure that content. Content Strategy is the first tool to integrate the methodology right into the tool so marketers can not only learn what works for SEO, but easily apply it without an SEO consultant. The tool uses machine learning to help surface recommendations that are relevant to a user’s business, and content that will perform well in search.
Using Content Strategy, marketers can:
– Discover topics to write about that are surfaced by HubSpot’s machine learning technology, then easily organize them into a topic cluster.
– Optimize existing content and build clusters that help increase authority and organic traffic.
– Track the views and clicks on each piece of content, as well as the contacts and customers being generated by each topic cluster, to clearly determine what works and what doesn’t.
Financials – Growth Continues to Come Online
Since 2015, HubSpot has enjoyed tremendous growth. The most recent quarter provided more of the same. The company earned $0.07 a shares against projections for a loss of a penny per share and a big swing from a loss of $0.07 per a year earlier. Gross revenue of $89.1 million this part quarter exceeded Wall Street estimates of $85.72 million. International revenue soared 62% and represented 32% of the total revenue for the quarter.
Sales growth of 37% slowed slightly from 40% in the first quarter, but this small dip isn’t a major concern. HubSpot has experienced rapid adoption of its $50-per-month marketing starter product, which will hurt the average subscription revenue per customer in the near term in order to push revenues higher in the future. The company’s goal is to convert these low-priced subs into upgrades or higher-priced products.
Total customers reached 34,326 in the quarter, an increase of 40%. Marketing customers increased by 30% to 26,560. The average revenue per customer was $10,228, while the average marketing subscription revenue per customer grew 6.6% to $12,773.
Positive free cash flow of $1.8 million should grow throughout 2017 and a successful $400 million convertible offering should allow HUBS to expand its foothold in AI via acquisitions and internal development.
For the third quarter, management expects a loss of $0.08 to $0.10 per share on revenues of $92.8 million to $93.8 million. Those are both increases from previous expectations. Management also guided revenue higher for the remainder of the fiscal year. Expectations are for revenue in the range of $362.8 million to $364.8 million, an increase from previous guidance of $356.44 million. Earnings of $0.03 to $0.07 a share exceed a previously expected loss of $0.08 per share. Free cash flow is anticipated at $15 million to $16 million rather than $13.14 million.
Opinions from Wall Street
Evercore ISI rates HubSpot an Outperform rating with a price target of $90.
Oppenheimer rates HubSpot an Outperform rating with a price target of $80.
UBS recently raised its price target on HubSpot to $84 from $77 while maintaining a Buy rating.
Cowen raised its price target on HubSpot to $69 from $63 while maintaining a Market Perform rating following the second quarter.
Analyst Derrick Wood believes that comps get tougher in Q3 and has some concern that HUBS is having to move down market to sustain growth, bringing into question the durability of growth from higher ARPC customers, particularly in the U.S. Cowen remains on the sidelines due to valuation, noisier customer/APRC metrics and a continued relatively rapid deceleration in overall growth.
SunTrust Robinson Humphrey initiated coverage on HubSpot with a Buy rating and a price target of $81.
BTIG upgraded HubSpot to Buy from Neutral with a price target of $73. Analyst Abhinav Kapur sees the freemium model as a catalyst for the shares and sees a path to long-term margin expansion and FCF generation (from -4% in FY16 to about 12% in FY21).
Raymond James analyst Terry Tillman comments: “We remain bullish on company fundamentals. After the company’s fireside chat at our investor conference two weeks ago, we are even more excited about the company’s ability to monetize bigger TAM and ARPU opportunities associated with selling the entire ‘growth stack’ that spans across marketing automation, sales and other ancillary solutions.
The Technical Analysis – Stability Needed Before the Stock is a Buy Based on the Price Action
After a rocket-ship first six months of the year, HubSpot has traded in a violently wide range since June. The stock hit a road bump in early June sending share tumbling to $65 from $78 in a few days trading. Over the course of the summer, shares have developed a higher low while grinding away against a closing high of $75 and an all-time high just above $78. This series of higher lows against a flat resistance level has created an ascending triangle pattern. While this pattern favors the bulls, it doesn’t equate to an immediate entry on the long side.
Our concerns here revolve around resistance and volume. Volume has been underwhelming on moves higher (green bars) while moves lower (red bars) have often occurred on greater-than-average volume since June. As investors, we’d prefer to see volume drying up during a selloff rather than spiking and then remaining higher. These high-volume selloffs have the potential to create staunch resistance on the way back up. Buyers at the higher levels become prime candidate to sell into a breakeven scenario.
Ideally, HubSpot would break through $75 on greater-than-average volume triggering an entry into shares. On the flip side, a retest of $69 on lower-than-average volume would also offer a long-side entry. Buying a retest of support means buying on a bounce off the $69 level, so we’d anticipate an entry in the $70 to $71 area as shares rise. We’d avoid buying shares on a decline into $71 until HubSpot demonstrates it can hold support on yet another test.
This $75 level is our focus. Until HUBS closes above those levels, we are not technical buyers. Instead, we’d focus on the rising support level of $69 and begin building a position in the $70 to $71 range and become aggressive buyers on a breakout over $75.
Our initial target on a weekly close over $75, independent of fundamental views, would be a return to $86 in short fashion with an ultimate upside of $95 to $100 within 12 months. HubSpot presents a challenge in terms of volatility as we expect shares to trade in $4 to $5 ranges each week, if not more. Secondary support in the low $60s means a breakdown of support will likely lead to a long entry, so patience is likely the one thing not needed here. But discipline will be.
Catalysts for the Thoughtful Investor on Why HubSpot is a Buy
The jockeying for position among SEO players is crowded and the expectation is other names will follow HubSpot into Inbound Content Marketing. Anticipating a rising level of competition and copycat players, HubSpot has embarked on a series of small acquisitions to gain a foothold on artificial intelligence and machine learning and implement those tools to strengthen its lead in the new paradigm in marketing and sales. Gartner predicts that by the year 2020, 30% of companies will employ AI to augment at least one of their primary sales processes. The use of AI will limit the time needed to perform tasks that formerly required manual processes. Those might include writing personalized e-mails or researching prospects.
Following this lead, HubSpot recently acquired Kemvi, an artificial intelligence (AI) and machine learning startup that helps sales reps deepen their relationships with prospective buyers. The company’s proprietary algorithm, DeepGraph, sifts through millions of pieces of content each day to learn what’s happening with buyers and prospects and delivers that information to sales reps. The technology will be incorporated into HubSpot CRM, giving salespeople even more tools to carry out more contextual, empathetic outreach to their contacts. In short, the customer can receive a more personalized buying experience as the salesperson can set aside mundane tasks to focus on the customer’s needs and satisfaction.
DeepGraph uses machine learning technology to help salespeople better understand their prospective buyers. The system identifies new prospects, provides suggestions for creating personalized e-mails, identifies new market segments, freeing up time that can be spent on more valuable sales tasks. DeepGraph also acts as a knowledge graph with information about buyers, markets and products, helping salespeople understand the nuances of their customers’ behavior.
More recently, HubSpot purchased Motion AI, a visual chatbot builder. The company’s cross-platform technology enables anyone to create a chatbot for their site, via SMS, on Facebook Messenger, Slack, and more — no programming skills required. Motion AI’s technology enables users to build, train, and deploy AI robots to do anything, from booking meetings and qualifying leads to running customer service chats and diagnosing problems, all without needing technical skills. According to Facebook, 53% of people are more likely to shop with a business they can contact via a chat application. Furthermore, HubSpot’s own research found that 40% of those who responded didn’t care if it is a real person or AI on the other side of the conversation as long as they received help quickly.
The Bottom Line
1. HUBS is a pioneer in online sales and marketing, leading the industry by combining the concept of inbound content with AI.
2. HubSpot’s Content Strategy is a new topic-based model on creating content called topic clustering. This approach helps marketers drive more traffic and also serves the search engine with better information architecture and more content the crawler can index.
3. HUBS introduced artificial intelligence as method (ironically) of powering easy-to-install chatbots for communication with potential customers to not only increase sales, but to free up salespeople, so the process can be more personalized.
4. In the range of $70 to $71, we like HUBS as a long-term buy and hold. Over $75, we like HUBS as a breakout to the upside. The small-cap nature, large short interest and aggressive financials will make it volatile.
5. HUBS recent acquisition make it an attractive acquisition candidate for large technology companies seeking an immediate foothold in AI and machine learning as it relates to sales and marketing.