This CRM software company is expected to grow 42.1% next year.
HubSpot, Inc (HUBS)
From Argus Weekly Staff Report
HubSpot is an early-stage CRM software company focusing on small and medium-sized enterprises that have traditionally been ignored by larger CRM providers. We expect HubSpot to grow by increasing its market penetration, upselling and cross-selling current customers with new products, and expanding upmarket into the enterprise segment. The company is also growing internationally and expanding its partner ecosystem, which includes systems integrators and third-party application providers.
The company’s platform is a multitenant, extensible, single-code-based software-as-a-service delivered through a web browser or mobile application. Management expects to drive growth by increasing market penetration, expanding product offerings (i.e., deploying new hubs), increasing value and customer wallet share, and driving upmarket growth into the medium and large enterprise segments. The company has focused on providing faster ‘time to value’ for clients and simplifying the use of its products through interoperability and application integration.
HubSpot employs a ‘freemium’ business model with a free basic CRM service aimed at small and medium-sized enterprise customers. One-third of revenue comes from businesses with fewer than 25 employees. HubSpot’s hubs feature an integrated suite of software products that mirror the sales, marketing, and customer service functions of typical businesses, and have three premium levels of service: Starter, Professional, and Enterprise. The company added a fourth hub, called Content Management System or CMS, in April 2020.
CMS enables clients to rapidly create and revise web content, personalize a website for different customers, and optimize websites for greater customer sales conversion. CMS comes in just two tiers: Professional and Enterprise. The functionality, service, number of seats, and price all increase as clients move to higher tiers, with HubSpot essentially growing along with the client. While the company’s hubs are designed to work together, they can also be licensed on a stand-alone basis.
The company sees its current addressable market as the 3 million small and medium-sized businesses in the U.S. and Europe.
While we do not wish to play M&A roulette, we note that HubSpot has exactly the kind of technology and client base that could make it an attractive target for a larger competitor.
We are establishing a 2020 non-GAAP EPS estimate of $0.95 and a 2021 forecast of $1.39. Our 2020 estimate is within management’s upwardly revised guidance range of $0.92-$0.96 but above the consensus estimate of $0.94. Our estimates imply a 24% decline in EPS in the COVID-19-impacted 2020 and a 45% rebound in 2021.
The trailing EV/sales multiple of 18 is above the high end of the five-year historical average range of 7.8-11.1. On a forward basis, HubSpot’s EV/revenue multiple of 14.3 is 60% above the peer average, well above the historical average premium of 33%. We are initiating coverage of HubSpot with a BUY rating and a target price of $350.
Jim Kelleher, CFA, Argus Weekly Staff Report, argusresearch.com, 212-425-7500, October 22, 2020