Software as a service (SaaS) stocks are all the rage with investors these days, and for good reason. Not only do these companies provide essential tools and services to customers across a range of industries, but they also tend to be particularly resilient in a range of economic conditions with significant balance sheet growth and stock price appreciation. In this section of Backstage pass, registered in December 14, Fool.com contributors Asit Sharma, Rachel Warren and Dimitri Kalogeropoulos discuss.
Asit Sharma: I’ll quickly go through the mine, which is HubSpoR (NYSE: Centers) Today, the HUBS icon. I think this is one of those overlooked ideas that are central to virtual opportunities. HubSpot offers inbound marketing programs. This is a method of marketing that draws customers in to you, rather than an advertising model where I hang a banner or try to get people to wave my arm.
Inbound marketing is when you use content to get a more organic landing of the customer on your pages where you can then try to convert them. HubSpot pioneered the concept of inbound marketing.
In fact, the two founders were famous for doing research on this when they were both graduate students, and they really carved a path for this type of business. But what I like about HubSpot is that it keeps adding hubs. Every part of its platform is referred to as a hub, but really what it is, it’s just vertical works, new software offerings for the Earth, and an expansion model. Their newest center is an operations center.
They are getting into the game and competing with companies that offer business automation and business improvement software. You can think of a service now as a company that might intersect with HubSpot’s offerings. You can think of intuit, which acquired Credit Karma and Mailchimp, as a company that could rival HubSpot. But HubSpot has a first-mover advantage in the inbound marketing world. What I love about them is that while they have a sharp valuation, they are an indispensable company.
They have proven their ground and expanded their model, which is aimed not only at large enterprise customers, but with a lot of small and medium-sized businesses and even mother and orange. Functionally, it’s very sticky and I see it playing a long-term role in this economy as more and more companies decide to use marketing tactics that have greater revenue and more beneficial returns. Get people who really want to serve you.
I like that even though they have been around for a long time, they are still growing at a really fast rate. This last quarter, their total revenue was $339 million, up 49% from this time last year.
Although that same quarter was very strong, they bounced back during the pandemic as companies that were on their way to the remote situation needed to purchase HubSpot’s services. This is growth over growth. The company is not profitable yet. I rented with a slight loss margin of about 4%, but the cash flow is positive.
They use a lot of stock-based compensation, and they have a larger non-cash component of their income statements. If you look at, let’s say the first nine months of this year, it generated $931 million in revenue, and generated $144 million in operating cash flow.
Basically, even though they get these, what we call book losses, they don’t burn money. They have a fairly strong balance sheet as well. As a founder-led company, I always like to see founders with great vision. Now, the CEO of HubSpot recently took a back seat, but he has promoted a very capable CEO in his stead. This is Brian Halligan and the CEO herself is an expert in the field. Yamini Ranjan is her name.
I think when you look at this landscape of companies playing into digital transformation, you have the crowded parts of the market where the companies that I love are fighting against each other like asana And Atlassian, maybe a company like smart paper. They all offer the same types of collaboration tools and workplace productivity tools.
HubSpot does not compete directly in those spaces. It is more prevalent among its content marketing hubs. It contains the Customer Relationship Management Center. I mentioned the operations center. A well-diversified company that isn’t fighting as hard for this one type of collaboration software market share. I keep my eyes on him. I’ve taken a huge hit after having had a massive dose over the past several years. But I just pulled it off, bear with me, everyone.
This stock, after boy, appears to be down about 30% from all-time highs, and still above 70% since the beginning of the year. I think this is the style that [laughs] We see you guys. When we look at stocks that we really like that have been battered but still positive for the year. I’m going to stop here at HubSpot because we have about 10 minutes left, and I want to get to those last two things. Any quick comments from either of you? Then we wrap up the quick fire with the rest.
Dimitri Kalogeropoulos: I would quickly say that I haven’t followed the stocks but have been following HubSpot services for a while. You know, I had a blog for a long time many years ago [laughs] And their email marketing, I remember reading about it. Here are some trivial points for you. I think from their blog they do a lot of work trying to get people click rates to open your content and your emails.
Do you know the most clickable first title they’ve ever tested? I don’t know if this is still true, you are not alone. [laughs] I always think of the Michael Jackson song when I hear it, but this is the song that’s hitting the charts for a reason. But again, this was several years ago. I don’t know if this is still true but this is the echo that resonated.
Rachel Warren: It’s a pretty cool piece of trivia, though. [laughs]
Asit Sharma: It is, and also useful. If you ever want a cold email, a CEO somewhere or someone who has-
Rachel Warren: Just put that in the subject line.
Asit Sharma: The attention you want, you are not alone.
Dimitri Kalogeropoulos: Here you are.
Rachel Warren: Fabulous.
Asit Sharma: Watch out, CEO of McDonald’sCheck your inbox tomorrow.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.