The 1 SaaS Stock I’m Buying Right Now

HubSpot stock is up 2,540% since its IPO in 2014 but here’s why this tech stock should be on the buying radar of growth investors right now

Oct. 21, 2021

Investing in software-as-a-service or SaaS stocks such as HubSpot (NYSE: HUBS) remains a popular strategy, given these companies have the ability to generate a steady stream of cash flows across business cycles, on the back of a subscription-based model. Since 2006, HubSpot has successfully expanded its suite of customer relationship management and digital marketing products, making it one of the top performers in the tech sector since its IPO in 2014. 

Let’s see why HubSpot is the best tech stock I’m investing in.

A look at HubSpot’s financials

HubSpot has increased its revenue from $375 million in 2017 to $883 million in 2020, indicating an annual growth rate of 33% in the last three years. One of the reasons for its stellar performance is the ability to grow its customer base and increase customer spending over time. 

HubSpot customers in the last year grew by 40% to 121,000 at the end of Q2, compared to 86,000 in the year-ago period. Further, the number of customers using more than three HubSpot products account for 30% of total customers, up from 6% four years back.

In the second quarter of 2021, HubSpot sales rose 53% year over year to $310.8 million. Subscription sales stood at $300.4 million, accounting for more than 95% of total sales, which rose by 53% in Q2. Its adjusted net income also increased to $21.6 million or $0.43 per diluted share in Q2 compared to $16.7 million or $0.34 per share in the prior-year period.

HubSpot remains unprofitable on a GAAP basis but its net loss narrowed by 16% to $24.6 million in Q2.

What I like about HubSpot?

In addition to its expanding customer base that has translated to robust growth in revenue and earnings, I believe the long-term prospects for HubSpot remain attractive. HubSpot has estimated its total addressable market at $87 billion and expects to target over three million small and medium businesses as potential customers.

We can see that HubSpot currently serves less than 1% of its target market and is well poised to drive revenue higher in the future. In fact, Wall Street expects HubSpot’s revenue to accelerate by 44% to $1.27 billion in 2021 and increase by 28% to $1.63 billion in 2022. But these estimates do not account for incremental revenue that the company will generate from its latest product- HubSpot Payments.

Risks to HubSpot’s share price

Similar to most other growth stocks, HubSpot stock is trading at a hefty premium. Given its market cap of $37.4 billion, its forward price to sales multiple stands at 29.5x while its price to earnings ratio is exceptionally steep at 470x. This makes HUBS stock vulnerable to a broader market sell-off.

Further, despite an improvement in profit margins, HubSpot continues to report a GAAP loss, and a rapidly expanding addressable market is likely to attract new players, thereby increasing competition.

HubSpot’s growth potential

Despite HubSpot’s sky-high multiples, it should remain on the radar of growth investors, as it’s almost impossible to time the market. Any significant correction in HUBS stock can be viewed as an opportunity to purchase it at a lower valuation. HUBS should beat the market if it can maintain its growth rates in the future.

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