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November 9, 2023

APP and HUBS Report. Watch List Update

APP and HUBS Report. Watch List Update

AppLovin’ (APP), a mobile app marketing company, has seen shares up, down and all around today after reporting a better-than-expected Q3 yesterday. Shares were up double-digits pre-market, were down once market opened, and are slightly up as of midday. Revenue was up 21.2% to $864.3 million and beat by 8.5% while EPS of $0.30 increased 4X over last year and beat by $0.03. One of the reasons for the stock’s volatility may be that President and CFO Herald Chen is moving on, though he’ll hold a board seat and act as an Advisor to the CEO for some time. Still, it’s the strong results, forward guidance and wave of analyst price target increases that have APP back in the black midday. The underlying reason for the strength in Q3 (which should power revenue for quarters/years to come and is why we got into APP in the first place) is the successful rollout of the AXON 2.0 marketing engine (AI, monetizes more marketers, self-improving, etc.) in the second half of the quarter. I’m not sure if all updated estimates are in but as of now, consensus implies 15.1% revenue growth in 2024, up from expectations of 13.3% this year. And EPS should soar over 80% to $1.49. Not bad. Keeping at buy. BUY

HubSpot (HUBS) reported yesterday after the close, and while results beat expectations things are slowing down enough that most analysts lowered price targets. Revenue of $557.6 million was up 25.6% and beat by 4.4% while EPS of $1.59 was up 130% and beat by $0.35. It’s a challenging market out there but HubSpot’s doing a fantastic job retaining customers and revenue, though customers aren’t adding new headcount to their deals. Moving upmarket to larger customers is still a work in progress, sales cycles taking longer. Big picture, while HUBS remains a great consolidation story (i.e., customers concentrating on fewer “best of breed” software providers, of which HUBS is one) it’s just a slog. That means that while we were hoping for 20% or more revenue growth in 2024 it’s increasingly likely that actual results will fall just shy of that mark, maybe around 18%. That could keep a lid on share price performance. At this point, I don’t see any supreme urgency to selling HUBS, but if the market turns south we could easily see a quick and painful decline here. On the other hand, should the broad market really take off, and the economic outlook brighten, shares would likely zoom higher. I think it’s equally possible HUBS could go either way, to be honest. Bottom line is right now I’m not convinced this is one of the brightest burning opportunities out there, so let’s sell around our entry point and look to revisit HUBS at a later date. SELL

Watch List Updates

In other news, LSI Industries (LYTS) reported on November 1 and, after reviewing the results and listening to the conference call (and monitoring the stock), it’s apparent that the seasonal trends going into winter will likely hold shares back. I like the story and will keep an eye on the stock on my own but will officially drop from our Watch List today.

Freshworks (FRSH) is also being dropped from our Watch List after lackluster share price performance following the Q3 report. While the company-specific details are different from HUBS, the big-picture trends keeping the stock back are similar (Freshworks sells customer service, IT service management and CRM software for small to medium-sized businesses). It’s just not a terrific market for these companies right now so better to focus elsewhere.

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.