Shares of HubSpot (NYSE:HUBS) have been on an absolute tear since the March 2020 pandemic lows. The marketing software solutions company has appreciated more than 450% since then. This return certainly beat the S&P 500’s return of 103% during the same time period. However, a new short report released today by an influential hedge fund has investors of HUBS stock concerned.
Kerrisdale Capital, a New York based hedge fund, issued a scathing short report on HUBS stock. The fund believes that HubSpot is a massively overvalued coronavirus beneficiary that lacks a real moat. A moat is a competitive advantage that a company has that gives it a unique edge over competitors. Additionally, a moat gives a company power to control market share and sales. Kerrisdale adds that HubSpot is unprofitable, yet still trades at 20x forward revenue.
Shares of HUBS stock have remained relatively resilient in the wake of Kerrisdale’s short report, down less than 2%. However, when Kerrisdale talks, people listen. Let’s dive into the details on the HubSpot short report.
What to Know About the Kerrisdale Short Report Rocking HUBS Stock
- Kerrisdale highlights that HubSpot has a recent history of major executives leaving. In the past few years, the company has lost its CEO, chief operating officer, chief sales officer and chief strategy officer.
- Prior to the 2020 pandemic, HubSpot’s revenue growth was in decline for several years. Kerrisdale gives credit to HubSpot for growing revenues after the pandemic due to mid-sized businesses rushing to go digital. However, the hedge fund argues that the price of HubSpot is now trading at a premium relative to industry peers for no solid reason.
- Indeed, industry peers SquareSpace (NYSE:SQSP) and Wix (NASDAQ:WIX) trade at an enterprise value to next 12 months revenue (EV/NTM revenue) multiple of 5.1x and 5.7x, respectively. Meanwhile, HubSpot trades at a 20x EV/NTM sales multiple.
- Kerrisdale believes this multiple will be unsustainable for HubSpot as pandemic beneficiary companies start to return to normal and investors begin questioning unprofitable companies.
- According to Kerrisdale’s research and interviews with online marketing professionals, HubSpot’s products are “‘good enough’ for many purposes but don’t possess any sort of commanding lead in capabilities or ease of use.” The hedge fund cites several online reviews that mention that the company’s variety of products doesn’t offer any real utility. Furthermore, several online reviews detail the difficulty of HubSpot’s learning curve and expensive prices.
- Moreover, HubSpot has raised capital in the past few years “with no obvious use for it.” The company conducted a $343 million secondary equity offering in 2019 and issued convertible bonds worth $460 million in 2020. Kerrisdale explains that all of the cash raised from these two transactions is still sitting on the balance sheet. The hedge fund believes that the cash was simply raised to extend HubSpot’s financial runway. Moreover, the capital raise took advantage of “share prices that seemed high at the time (yet now imply dramatic downside for the stock).”
- As the digital transformation moves on, competitors to HubSpot are receiving capital easily. Kerrisdale highlights Klaviyo, Mailchimp and SharpSpring as three major competitors. Kerrisdale mentions that: “With its startup days now long behind it, HubSpot isn’t the disruptor; it’s the disruptee.”
- Finally, Kerrisdale Capital disclosed that it is short shares of HUBS stock.
On the date of publication, Eddie Pan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.