HubSpot Stock (NYSE:HUBS) a Buy: The Digital Transformation of Marketing

With so many different software stocks performing well in the market this year, it’s easy to let some of them go unnoticed. Many of these companies are seeing strong earnings growth thanks to how the pandemic has impacted the business world. What’s interesting is that even though these high-flying cloud software stocks have already experienced success this year, many of them are only just scratching the surface of their total addressable market.

Take HubSpot (NYSE:HUBS), for example. It’s a leader in customer service and engagement software and could be a strong investment opportunity going forward. HubSpot focuses on selling its CRM software solutions to small and medium-sized businesses which have long been overlooked by larger CRM providers. The stock is up over 134% year-to-date and is one of the more underrated growth performers to keep an eye on. Let’s take a further look at HubSpot’s business and discuss a few reasons why the stock is a buy at this time.

CRM Software for Smaller Companies

If you aren’t familiar with CRM software, it is software that is used to manage the relationships with a company’s clients. We know how important it is for any successful business to make sure that their customers stay happy, and software like HubSpot makes that much easier to accomplish. Businesses can use this software as a central place to organize all of the details about leads and existing customers so that an entire organization knows exactly what is going on with every customer relationship.

HubSpot’s software also features integrated applications that can help companies attract people to their websites, convert those visitors into leads, and ultimately close those leads. By using social media, search engine optimization, content management, e-mail marketing, and advanced analytics, businesses can leverage HubSpot to add new customers and keep existing customers engaged. When you think about how important digital marketing tools and CRM are for small and medium-sized businesses, it’s easy to see why HubSpot is in high demand. The company estimates its current addressable market as roughly 3 million small and medium-sized businesses in the U.S. and Europe.

HubSpot creates a wide sales funnel with a “freemium” model that allows small and medium-sized enterprises to try the software before buying. One-third of the company’s revenue comes from businesses with fewer than 25 employees, which means HubSpot operates in a niche market that is typically overlooked by larger CRM providers. It then converts non-paying customers into annually recurring revenue with the average revenue per paying customer coming in at $10,000 per year for the past few years.

Blowout Q3 Earnings

HubSpot stock had a very strong November as it was up over 35% thanks to its blowout Q3 earnings report. The company beat the consensus Adjusted EPS estimate by $0.16 and the consensus revenue estimate by $10 million. With Q3 revenue increasing 32% year-over-year to $228 million, it’s clear that many small and medium-sized businesses are on-board with HubSpot’s helpful software suite. Another positive is that subscription revenue increased by 32% year-over-year in Q3, which means that investors can expect more recurring revenue for the company going forward.

HubSpot reported a total customer count of 95,634, which was an increase of 39% year-over-year. The company’s management raised its full-year guidance and the company could continue to put up strong numbers going forward thanks to more small businesses looking to update their marketing platforms in the wake of the pandemic. There’s also the fact that HubSpot has a growing international presence and an expanding group of partners like systems integrators and third-party application providers that can help it continue the positive momentum. The bottom line here is that Q3 was another very impressive quarter for a company that has a lot working in its favor at this time.

Software Stock Risks

Thanks to the fact that HubSpot is an early-stage technology company, there are certain risks that investors should be cognizant of before adding shares. For example, although the company reported strong earnings in Q3, it is still unprofitable on a GAAP basis. Software update issues and bugs are always a possibility and can be especially painful for companies like this. Also, thanks to the company’s lofty valuation, the stock could be susceptible to large pullbacks if HubSpot is unable to deliver against analyst expectations. These are a few of the common concerns for growing software companies, which doesn’t necessarily mean investors should avoid them.

Perhaps the biggest risk that investors should note is that HubSpot competes with large companies like Salesforce and Microsoft. There’s always the risk that businesses decide to go with established legacy providers over a smaller company like HubSpot. However, since HubSpot targets a smaller underserved niche market, it should be able to continue putting up strong sales over the next few years regardless of what larger CRM providers are doing.

Final Thoughts

HubSpot is one of the most underrated software stocks to consider buying at this time. With blowout earnings, a large addressable market, and a software suite that allows HubSpot to grow with its clients, HubSpot is worth a look for investors that are interested in a rapidly expanding company that is revolutionizing the way businesses handle their marketing.