Even by the standards of a market that loves growth names, HubSpot (NYSE:HUBS) has had a strong 2020. HubSpot stock has raced to new highs, nearly tripling from March lows and climbing 63% year-to-date.
As with so many growth names, valuation admittedly looks like a concern. HUBS trades at almost 200x consensus earnings-per-share estimates for next year. Price-to-revenue sits at 15x.
But the market, correctly in my view, has made its preferences clear. Growth has trumped valuation. So has quality. HubSpot offers both, and that’s a key reason why HubSpot stock should continue to rally.
Why HubSpot’s Business Is Still Holding Strong
HubSpot offers a suite of software that helps small and medium businesses (SMBs) grow. The focus is on fueling a business’ “flywheel,” a marketing model that focuses on customers above all else.
That focus drives what HubSpot calls “inbound marketing.” Traditional sales and marketing efforts would be considered “outbound.” Television spots or even targeted online advertising don’t necessarily find the best potential customers — or potential customers at all.
In contrast, HubSpot’s suite allows SMBs to create content that excites potential customers. Its Sales and Service hub focuses on existing customers, a key source of valuable referrals. In essence, HubSpot positions businesses to be where customers are looking, rather than trying to get those businesses in front of customers whether they’re looking or not.
It’s not hard to see why that model is so attractive right now. It allows for better marketing than traditional methods which may not be as effective. More importantly, SMBs may not have the capital or the scale to effectively grow through those channels.
HubSpot is the exact type of play I love. It has that same kind of high-level innovation that helps a relatively unknown stock soar to superstardom quicker than the kings that spent years setting the foundation.
It’s a trend that isn’t going anywhere, and it’s a trend that can drive growth for years to come.
HubSpot’s growth potential was highlighted by a strong second quarter earnings report last week. Both revenue and profits handily beat Wall Street expectations, and the report drove at least two analyst upgrades.
Admittedly, in the context of SaaS (software-as-a-service) performance of late, 25% revenue growth doesn’t look all that impressive. But, again, HubSpot focuses on SMBs — and drove that kind of growth amid the worst of the pandemic. If you’re looking for astronomical growth potential, you’ll have to look to other plays, like my pick for the next big thing in smart phone technology. It’s set to lead a communications revolution that no one is paying attention to right now.
Indeed, chief executive officer Brian Halligan admitted on the second earnings conference call that “demand was soft like a marshmallow“. Yet revenue still grew nicely.
Square (NYSE:SQ), which also has a heavy penetration of revenue from SMBs, saw basically zero top-line growth in Q2, excluding bitcoin revenue. That’s not a knock on Square, a company on which I remain bullish, but it shows how much pressure the category saw in the second quarter.
HubSpot sailed through that pressure. Margins even expanded, as operating profit increased 50% year-over-year.
If this is a soft quarter for HubSpot, imagine what the business will look like when normalcy returns.
The Long-Term Case for HubSpot Stock
What’s attractive about HUBS is that the growth runway has years, and maybe decades, ahead of it. According to the most recent investor presentation, revenue has grown at a 39% annualized clip since 2014. Yet in some ways, HubSpot is just getting started.
After all, this is a business that started basically as just an app. It now offers a broad suite of software, including the launch of a new content management system in June.
From here, HubSpot plans to develop an integrated platform, which can handle all of a business’s sales, service and marketing needs. And after that, more offerings are likely on the way.
This seems like a story similar to the rise of Salesforce (NYSE:CRM). CRM stock, without exaggeration, has been one of the best growth stocks of all time.
Certainly, HubSpot stock isn’t cheap. But neither is CRM, SQ, SHOP or Sea Limited (NYSE:SE) … or any of the big growth winners of recent years.
And there’s a simple reason why: those stocks shouldn’t be cheap. Again, HubSpot has years of growth ahead. Margin expansion, as befits the software model, will follow. The company is targeting operating margins of 20-25% against 9.4% in Q2.
That’s years of bottom-line growth, and decades of big-time profits. That’s where investor focus should stay, and it’s why the rally in HubSpot stock isn’t over yet.
With all of that in mind, I want to quickly bring your attention to another growth play that’s bound for long-term success that’s perhaps even more impressive.
The company is set to lead the tech world by inducting a technological revolution that will forever influence mobile communication on a global scale.
As InvestorPlace’s chief technology analyst, I’ve worked feverishly with our veteran research team to identify the best stocks to buy. Over the years, InvestorPlace’s research has helped millions get ahead of the curve. Our subscribers have enjoyed massive gains in tech titans like Apple (19,954% gain) and Intel (12,547% gain) … just to name a few.
Now, I’m ready to share with you the next big development in mobile technology. The company has already inked deals with Apple, Samsung and LG. And it stands to forever change the way we think about our smartphones and mobile technology.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.