HubSpot and the Shift to Digital Marketing

10/27/2017 5:00 am EST

Focus: CONSUMER

Timothy Lutts

Publisher, Cabot Heritage Corporation

One of the market’s leading themes over the past few years has been companies that help other firms (including small- and mid-sized operations) succeed in the evolving digital, e-commerce world, asserts growth stock expert Timothy Lutts, editor of Cabot Stock of the Week.

Marketing has been revolutionized by the great shift to digital. Gone are the days of cold calls, email blasts and direct mail.

Taking their place are so-called “inbound marketing” efforts that are less intrusive, offer potential customers more relevant content and yield far better results. (The term inbound means attracting customers by offering good content, rather than pushing content to them that they may or may not want.)

HubSpot (HUBS) is a leader in the inbound marketing field, offering a software suite and supporting services that help any business find more customers.

The company has two main products, Sales Hub and Marketing Hub. Its Sales Hub can track every interaction with a lead, notify a client when a lead clicks a certain link or opens an email, automate a personalized follow-up and more.

The Marketing Hub is more well-rounded, helping clients modify their websites with drag-and-drop functions, optimize posts and content for search engines or social media, form great-looking landing pages to boost organic traffic and conversions. And HubSpot also offers a free customer relationship tool to easily organize all a business’s contacts and efforts.

While there’s obviously competition in the marketing field, HubSpot seems to have hit on something unique, especially given that it was built from the ground up for the inbound marketing world we now live in. It’s also focused on the mid-market, with its clients generally having fewer than 2,000 employees.

The Marketing Hub is the main driver, but everything is selling well as companies big and small move to HubSpot to attract leads.


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The firm has more than 34,000 total customers today in more than 90 countries and offices in six countries. The vast majority of revenue (about 95%) comes from subscriptions to its software suites, with the rest from professional services and support.

Business has been very consistent and very strong, with revenues growing sequentially every quarter since the company came public in the second half of 2014.

Overall revenue growth has decelerated a touch in recent quarters, but Q2’s figure of 37% was just fine by our standards, and at a recent Investor Day, management nudged up its Q3 outlook.

Analysts are now expecting another quarter of 37% top line growth when results are released on November 1. We also like how earnings have just begun to head into the black.

At the Investor Day, management laid out its long-term financial model, which brought a smile to many investors’ lips. The company’s operating margin was a minuscule 2% in the first half of the year, but that’s up from -14% two years ago and, over time, the top brass sees that figure ranging from 20% to 25%.

Without getting into specific projections, the bottom line here is that HubSpot has a ton of earnings power as the business continues to grow.

As for the stock, HUBS made no net progress between late 2015 and February of this year, but then shares broke out on the upside and rallied as high as $78 in June.

That led to another, shallower consolidation, which the stock ripped out of just a few days ago thanks to management’s bump in Q3 guidance. After five straight days of big-volume buying, HUBS has pulled back calmly in recent days, offering a nice entry point.

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