HubSpot is up more than 1,500% since this company came public in 2014,
but does the pioneer of inbound marketing deserve
a spot in your portfolio? here's all the key information that you need to know
HubSpot is a 23 billion dollar company that goes by the ticker symbol hubs h-u-b-s HubSpot's
mission is to help millions of organizations grow better simple optionable i love it the company got
its start by focusing on inbound marketing it helps small and medium-sized businesses attract
customers to their website via blog posts videos and podcasts however it is since
expanded to include multiple hubs including sales service content management it is a fully fledged
platform HubSpot deploys a software as a service business model about 97% of the company's revenue
comes from subscription sources and it has about 3% of revenue coming from services technically
this company has a freemium model where some of the tools are available for use without having
to pay subscription however the vast majority do require a subscription the company's dollar based
net revenue retention rate is over 110% recently that's a very impressive number given that this
company mostly caters to small and medium-sized businesses who tend to be higher churn customers
those customers because there is churn and there are a lot of them are expensive to acquire meaning
that customer acquisition costs are medium high for this company on the bright side once you
start using these tools you tend to stick with them throughout the economic cycle and the vast
majority of this company's revenue is recurring in nature now when we look at the company's moat
i would argue that there's a weak network effect within organizations but the first most important
one are switching costs that 110% net dollar retention is really high for a company that
focuses on such small teams once these teams start using HubSpot they would be load to switch we also
think that the company's brand name HubSpot has become synonymous with inbound marketing which
is essentially a category that it has created for that reason i would give this company credit for
having a strong brand because of these multiple moats the fact that the company is acquiring new
customers and is able to roll out new products to its existing customers we believe the moat
is widening for HubSpot one of the key ways that you can see how this moat is widening is to look
at the number of customers that are using more than one of the company's hubs if you look back
in 2017 you'll see that two-thirds of them were using just the marketing hub but fast forward
to the beginning of 2021 and over half are using two or more hubs as a company adopts more hubs the
switching costs become even higher turning to the company's financials revenue growth here has been
very good for many many years in the last three years this company's top line has grown at a 37%
compound annual growth rate gross margins are just a hair below 80% which would be the envy of
most publicly traded companies that's all good but the bottom line isn't as pretty at least on a gap
basis on a gap basis this company is not producing any profits however when we look at free cash flow
which measures the amount of cash that's actually going in and coming out of the business it has
not only been positive over the last three years but it's been increasing at a nice clip company's
balance sheet isn't perfect but with $1.1 billion in cash and just over $750 million in
debt the company can easily survive any economic downturn and because the company has negative net
income its returns on capital are negative but we don't expect that to stay that way for very long
let's switch gears and look at the management team HubSpot was founded by brian halligan and dharmesh
shaw both of whom are still at the company today however they are not in the corner office that
corner office is now occupied by yamini rangan who's been with HubSpot for two years and has
been the ceo for a little less than a year before that halligan had been the company's ceo hubspot
does a phenomenal job at keeping and engaging its employees the company gets stellar reviews
on glassdoor and has won numerous best places to work award and if we look at the company's
latest proxy statement we see that insiders own six percent of shares outstanding which
isn't super high but it's also not bad especially when you consider that that is worth one and a
half billion dollars at today's price turning to potential HubSpot has clearly demonstrated that
it has a lot of optionality in the platform it started out as just a marketing hub and
overtime has added new products and services that have opened up new revenue opportunities for the
business as we've already covered because this company is not net income positive it is still
in the red however it is quickly approaching the break-even point and we expect that once it does
net income will increase markedly third parties believe that HubSpot's total adjustable market
opportunity is around $8.4 billion dollars of which the company has captured about 14%
it is worth knowing that that $8.4 billion number is expected to grow rapidly over the next couple
of years and what's truly impressive about the company's expansion into new hubs is that the
vast majority of it has come without acquisitions it is all organic HubSpot has been a phenomenal
investment ever since it came public this company has spanked the returns of the s p 500 since its
ipo'd and over the last five years the company also consistently outperforms analyst expectations
and over the past year four out of four have come in ahead of the consensus at the same
time the company is not yet focused on capital return so it's not paying a dividend buying back
shares or paying down its debt now turning to risk one of the key if not the key risks to keep an eye
on is competition this is a highly competitive and lucrative market on the plus side with hundreds of
thousands of paying customers there's almost no customer concentration risk for investors to be
aware of now part of those really great reviews on glassdoor probably have to do with employee
compensation hubspot is not timid when it comes to granting stock-based compensation which means that
dilution has been fairly high on the plus side we think that this company is fairly easy for
investors to understand and there are few outside forces that we could think of that would impact
this business so what's the catch well the main one is its valuation this is an expensive stock
trading at nearly 30 times sales and over 150 times free cash flow so what are the key things
for investors to watch moving forward number one is multi-tool customers you want to see customers
not only come in but you want to see them upsell over time into more and more hubs second we want
to watch those retention rates it was a big deal when HubSpot was able to move its net retention
rate from below 100 to above 110 you should want to see it stay above 110 and finally keep an eye
on the bottom line HubSpot has been in hyper growth mode on its top line for many many years
and its margin profile is great moving forward we want to see those translate into net income
and see outsized growth in profits for many years to come so had this company score on our investing
checklist it did extremely well on my checklist getting a quality score of 84. that is well into
my high quality business category it did very well on mine as well getting an 11 and a half
a half point short of that coveted anti-fragile territory it makes me wonder why don't i own this
stock all right brian both you and i think that this is a very investable idea so we're going
to head on over to stockcard.io to hold ourselves accountable i'm going to open up the antifragile
portfolio which is your thumbs up portfolio i'm going to enter the ticker symbol which is h-u-b-s
for hubspot i'm going to do a buy decision today's date is monday january 10th this is a $509 stock
so we're going to be buying two shares and this scored 11 and a half on your investing checklist
then we're going to head on over to my portfolio which is the brian for all the quality checklist
and we're going to do the exact same thing while brian does that we want to remind all of our
viewers that you can head on over to stockcard.io and register with the website and when you do you
can enter the Beat the Brian's contest so far we've got over 300 portfolios the top scoring
portfolio the one with the greatest returns across five stock picks will win a thousand
dollar prize at the end of the year with smaller prizes spread out throughout the year join today
and it's a fun and educational experience we hope you found this video to be informative both brian
and i think that hubspot is an interesting company with a very bright future ahead of it brian's out