DISCLAIMER: This note is intended for US recipients only and in particular is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.

Doesn’t Eat Its Own Cooking

Given that HubSpot, Inc (HUBS) is a leader in digital marketing software, it’s rather surprising to us at least that it’s not a more high-profile company. You rarely see it made mention of among the cloud-sector commentariat on Twitter and elsewhere. A little long in the tooth, HUBS was established in 2006, making it a fully paid-up member of the original Internet 2.0 cohort, alongside Workday (WDAY) and others born at that time. Likely due to its age you don’t see the name bandied around so much in breathless recants of hot cloud stocks.

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That’s a little odd, since its performance has trounced the NASDAQ – below we show the stock price gain since IPO vs. the NASDAQ proxy ETF, QQQ.

Source: YCharts.com

Speaking as a customer, HUBS software is a little old-school to use in fact. Firstly, it’s a rare suite offering in a world where right now growth stocks are mainly point solutions. If you so choose you can use HUBS to handle your digital marketing, your corporate contacts, sales funnel and even your website and the content management functionality sat behind the site. Our guess is that few customers use all its functions. Secondly, the user interface requires a little more technical understanding than the very latest front-office enterprise cloud apps. We aren’t quite talking command-line interface vs. iPhone here, but certainly the age of the HUBS UI designs does show a little.

In our Q3 earnings preview, given the run-up in the stock, we expressed caution as to its future prospects. You can read that note here.

We’re happy to say that we were too cautious. Q3 delivered substantial acceleration in revenue growth and in addition, EBITDA and cashflow margins also grew. Encouragingly for future quarters, there was a material increase in the rate of growth of deferred (prepaid, yet-to-be-recognized) revenue.

(If deferred revenue isn’t a familiar concept to you, check out our Seeking Alpha blog post here on the topic.)

Numbers as follows:

Source: Company SEC filings, YCharts.com, Cestrian Analysis

That’s an impressive quarter as you can see.

Never ones to stand on ceremony, we subsequently moved to Buy – Long Term Hold in our subscription service. Cestrian staff personal accounts subsequently added to the stock with a long-run hold period in mind. It appears that HUBS may be able to gain benefit from the increased standing of digital marketing and sales which we believe will remain even once the Covid crisis recedes. The fact is that, as has been seen at Google (GOOG) and Facebook (FB), digital marketing done well can be much cheaper and more measurable than its offline cousin. So in the post-Covid-crisis world when companies have learned to do more with less people, and more with people spending less time together in person, we believe the sales & marketing functions of the enterprise will continue its digital shift. This can benefit many companies, not just HUBS – others that spring to mind being Salesforce (CRM) and Adobe (ADBE) – but we do think that HUBS can be a player of increased import here.

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We moved to Buy in our subscription service on November 13; we’ve gotten a little short-term lucky since the stock has continued to move up even as the Nasdaq became moribund.

Given that Q3 revenue growth acceleration, and in particular given the increase in growth in deferred revenue – at a time when a number of cloud stocks, rather quietly it seems, are seeing a fall in deferred revenue growth rates – see for instance WDAY in the note to which we link above, or for instance DataDog (DDOG), which saw its deferred revenue growth (vs. the prior year quarter) move from +105% in Q1, to +57% in Q2, to +37% in Q3 (source: company SEC filings, Cestrian Analysis) – HUBS is actually increasing the growth in its prepaid, long-run contract sales – we’re increasingly confident in HUBS’ prospects.

We remain at Buy – Long Term Hold.

Cestrian Capital Research, Inc – 23 Nov 2020

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Disclosure: I am/we are long HUBS. Business relationship disclosure: See disclaimer text at the top of this article.

Additional disclosure: Cestrian Capital Research, Inc staff hold personal account long position(s) in HUBS.



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