HUBS Earnings Review

Investment Analysis Clubs Saul’s Investing Discussions
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A while back, I highlighted Hubspot (HUBS) as a potential company to watch due to improving growth rates. I promised to follow up after earnings. I’ll try to keep this short and simple.

Last 4 quarters revenue growth:

2020Q4 2021Q1 2021Q2 2021Q3
35% 41% 53% 47%

Total Customers:

2020Q4 2021Q1 2021Q2 2021Q3
103994 113925 121048 128144

ARPU

2020Q4 2021Q1 2021Q2 2021Q3
$9758 $9886 $10198 $10536

So, solid performance, but the trend of increasing growth was broken, and I suspect the growth will continue to decelerate. Here’s why:

In my initial write-up, I talked about how implementing Hubspot generally requires hiring a marketing company who bill themselves as Hubspot integrators. The whole process requires a lot of work–basically re-building the company website and creating marketing content to drive the Hubspot process. The number I spoke of in the first review was a cost of $150,000 which I have seen quoted when my company was looking at implementing Hubspot earlier this year. (We did not.)

That’s not the problem, exactly. Rather, it is the labor-intensive implementation that it implies. Because it is a lot of work, while HUBS might be a SaaS company, it can’t grow as fast as many other SaaS companies.

Look at the customer growth. It’s not exponential; it’s linear. It’s been between 7000 and 9000 new customers per quarter for the last 2 years and they are guiding for 7000 new customers in Q4 of this year.

Then, look at ARPU. It’s growing, but at only 9% YOY (and only 4% higher than Q1 of 2020, so I’m not sold that this will continue.)

If they add 28000 new customers in the next year, and keep 9% YOY ARPU growth, that implies 33% growth around Q3 next year. Still a good business, but not what Saul is looking for.

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Saunafool, I agree that HUBS is not your typical post-pandemic SAAS Company. It aligns more with the likes of Salesforce, WorkDay, and ServiceNow (the “originals SAAS” companies). This is due to, different from edge services and IT infrastructure, which impact only IT processes (think DDOG, NET, ZS, CRWD), implementing software that changes business processes (CRM, ERP, HR) is, inevitably, a longer process. HUBS is a essentially a CRM that will drive the whole lifecycle of the customer, from Sales and Marketing to Customer Service, Content Management, and Operations.

It still doesn’t change what you said on your post: the hyper-growth is not guaranteed. But it’s an extremely sticky solution and I expect them to keep launching new modules, increasing NRR.

Their execution is pretty consistent. It might not check all the boxes to be a “Saul’s stock”, but my first buy is up 180% in 13 months, but it’s only a 2% position for me. It was a MF recommendation.

Rod

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But it’s an extremely sticky solution and I expect them to keep launching new modules, increasing NRR.

Yes, the upside is that once a company has gone through the process of aligning their sales process with HUBS, Salesforce, or another CRM solution, they just aren’t going to switch.

This stickiness should give HUBS some pricing power to raise ARPU down the road even without expanding modules. So, Hubspot is definitely doing a great job. They have really become the solution for smaller and medium sized companies.

I just think the box that it fails to check as a “Saul stock” shows up in the linear growth rate of new customers. If new customer growth remains linear, revenue growth almost has to slow down.

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