I’m posting this because no one else did. Here’s a link to an SA bear case against HUBS. The author makes what I think is a reasonably sound bear case on HUBS. I’m long HUBS, but now re-thinking my position. I just wanted to gather the impression of others on this board that own/follow HUBS.
https://seekingalpha.com/article/4150664-2-reasons-avoid-hub…
Brittle rock,
Your point appears to be very valid based on the dilution and debt points made in this article:
“…Holding all else constant: instead of your shares being worth over $222 per share, because of the dilution they’re now worth only $28.42 per share. Even though the company doubled its revenue, it increased its share count; thus, rev per share has decreased from $9.92 to $2.35, instead of doubling to $19.85…”
Another perspective was pointed out by Ant in his post yesterday regarding his growing concerns about high growth companies taking on too much debt is validated by the second point in this article.
Both these sources along with Saul’s concerns about HUBS and reducing his position by 50% after their last quartet earnings announcement cause me to become significantly less excited about holding this name.
sjo
Sorry but, dilution? Yawn. I feel like this article could have been written about any company we follow on this board. Hubspot isn’t exhibiting any red or even yellow flags. This article is much ado about nothing.
I hate to try to speak for Saul so I won’t. But what he said already was:
They had great December earnings but I just don’t feel confident about their long term room to grow.
That’s how I feel too, but it’s neither anything new nor is it a huge indictment on HUBS. Yes, I think SQ and SHOP and ANET are tackling larger opportunities long term. They’re also valued at several times what HUBS is. All can do very well.
Bear
Hi rock,
I can’t disagree that that is a lot of dilution for stockholders but I would urge you to read the article again with a critical eye. This chick has 18 Seeking Alpha articles and 17 of them are very negative. (For some reason she likes Clorox. Maybe she’s a blonde?
Her stated goal in investing is to preserve capital. Which is fine in itself but it could also be a nice description for a capital weenie. 
As far as her rant on vocabulary goes she just lost even more credibility with me.
Does it make sense to you that this offering of convertible debt would be repeated again bringing the same rate of dilution over the next 10 years? For what it’s worth, it doesn’t pass my sniff test.
She may be right in the end, but I wouldn’t bet on it myself. I think it might be worth checking out someone else’s thoughts on the stock and to double check her numbers from the source before you sell.
At least read the article again and quit looking at her picture.
Good luck.
Dan
Let’s say, over the next five years, HUBS performs amazingly well–doubling its revenue.
Hi Brittlerock,
As you know I’ve been reducing my position in Hubs, but when I read this in the short article, I stopped reading. If that’s the straw-man premise he’s knocking down, forget it! Increasing revenue at 14.6% per year would double their in five years. Does anyone thing that that would be an “amazing” result for them??? That would be an inconceivably poor result for them. Revenue was up 39% last year! Give me a break! This is a “reasonably sound” bear case???
Not to me.
Saul
Let’s say, over the next five years, HUBS performs amazingly well–doubling its revenue.
As an example, if their revenue growth rate dropped this year from 39% down to 30%, the next four years they’d need all of a little under 12% revenue growth per year to double in five years.
This is “performs amazingly well”???.. It’s actually performing even more poorly than you can imagine. Try it! Can you imagine them doing that poorly? And the author is building his or her short case against that as his best possible estimate. What hogwash!!
Sometimes Bear (and Bull) articles need a little critical reading. (And I was someone who had reduced my Hubs position because I thought it was too large for what it was.)
Saul
Saul:
was your decision to cut back on HUBS because you wanted to put that money elsewhere? if that is the case why HUBS and why so dramatically (half)?
I was not sure I understood your comment in your monthly report about the executives being ‘childish’ and being lucky?
tj
was your decision to cut back on HUBS because you wanted to put that money elsewhere? if that is the case why HUBS and why so dramatically (half)?
I was not sure I understood your comment in your monthly report about the executives being ‘childish’ and being lucky?
Hi tj,
Yes, I put the money elsewhere. I think I was very clear about why I reduced my position. If you didn’t like my reflection about management, just drop it out (see below). I never anywhere said (or thought) anything about them being ‘lucky,’ by the way. When I read the below paragraph from my month end report, it seems very clear to me. It was a question of lacking gravitas, weight, compared to the other companies I mentioned. Just not worth a 12% position.
I dropped Hubspot from 4th place to 9th place at 5.2% this month with the rise after earnings. They had great December earnings but I just don’t feel confident about their long term room to grow… I waited until after earnings to sell any, knowing that they’d have a huge beat because of moving their big conference out out of the December quarter, and I only reduced my position and didn’t sell out, but Hubspot just didn’t seem like it should be a 12% position to me. It doesn’t seem that it has the same quality as Shopify, Arista, Nvidia, etc.
Saul
'They sound to me like a bunch of kids with a tinker toy set, just trying out things and saying, “Wow, that worked!” ’
That is where I got the ‘lucky’ comment.
I still don’t really see your reason. If it is about the executives, I don’t think that is anything that transpire in the last few weeks or on the report. Such comments could have been made much earlier.
It’s not anything about liking or not liking your comment. just wanted to understand…
tj
just wanted to understand…
TJ,
Think of it this way: there are thousands of companies to invest in. Hundreds that do something fairly interesting. Dozens that have recurring revenue and outsized growth. But they won’t all perform the same.
Our task is to find the real gems. To weed out the ones whose rapid growth won’t last. To weed out the ones that don’t have the ability to leverage and may never make money. To weed out the ones with bad management who will ruin a good thing.
Then we come up with maybe 20, 30, or 40 companies we truly believe in. Within these, we have to figure out which ones to own, and how much of each. I’m pretty sure Saul is just saying that he’d rather own more SHOP, AYX, ANET, SQ, etc, than he does HUBS, percentage-wise, because he feels more strongly about them. He has expressed interest in NEWR and INST and some other good companies that he doesn’t own. He’s even sold some companies he still thinks will do well.
Why? Because he’s looking for the best of the best.
Why now? His conviction changed slightly. It was the way something(s) said on the CC struck him, or it was the way the company presented numbers in the report. Or it was something that just randomly struck him about the combination of performance and price and growth and potential relative to the other companies Saul owns. Who knows? Maybe not even Saul. Investing isn’t all about quantification. But Saul did explain his thinking: the comment you mentioned where he said sounded a bit experimental, and the bit I quoted about the opportunity being relatively smaller.
Ok now I am just speaking for Saul. LOL. My bad – sorry, Saul!
Bear
Thank you Bear, for putting my thoughts more clearly than I was able.
Who knows? Maybe not even Saul, is absolutely correct.
Saul
That really was a great post, Bear. Like it is the essence of the Knowledgebase in one short post.
BrittleRock
I looked at this article but it reminded me of a previous article saying exactly the same thing. The previous time I read it, the dilution figure seemed fairly average and of no particular standout concern for a high growth stock. This article presumably is working off the same data but found a way of portraying it in a much more negative sounding way - cumulative wealth destruction instead of single year share count inflation.
Ok it made me read it again but as per Saul, I find it a totally pathetic bear case and not one that if you have conviction in this stock you should be worried about. It shouldn’t tell you anything you don’t already know. If you don’t already know the SBC levels of one of your investments then you haven’t done enough due diligence. It doesn’t in this case change my conviction which is possible to challenge on other grounds - as Saul has done.
Ant
I want to thank everyone who chimed in (but there’s no way to reply to all). Thanks for the education. I did go back and look at the author’s profile and realized that she was mostly looking for excuses to not buy any high growth company. That leaves her with picks like Clorox, a good solid non-cyclical home products company that will probably do a decent job of protecting her capital which is her primary stated investment priority. I’ve come to the realization that it takes a special mindset that don’t share in order to have this protection of capital to be onces top priority.
First, you must treat every investment as a stand alone investment without any concern about its place in a portfolio. When I look at my performance, as Saul has shown by example, look at my portfolio first, individual stocks are subordinate to the portfolio.
Second, you must have the notion that each investment is forever. She puts her HUBS discussion in a five year context as if you would be totally helpless to react to this dire outcome with all its erosion of wealth through dilution. Or, possibly you would somehow not notice that things weren’t going as planned sooner rather than just waking up to it after all the damage had occurred. The idea of possibly selling the stock if and when the erosion begins to actually impact the growth is not even considered. I pretty much do investment homework daily. Even with that, I’m not as diligent as I know I should be, but I’m pretty sure I would notice something like this before it became devastating.
Well, to each his or her own. Maybe this is actually reflective of this woman’s investment style. Or maybe she’s among those who have learned that there’s always an audience that will find you if you’re peddling fear. I think it’s the same reason people go see horror movies. There’s some part of the lizard brain that hones in on fear, realistic or not.
Maybe it has to with adrenaline or endorphins or something. But IMO there are enough real risks to take into consideration when making an investment without manufacturing new ones. Thanks again for helping me clarify my thinking on this.
Actually one last thought BR before we close the book on this thread.
I wanted to go back to Saul’s point.
'They sound to me like a bunch of kids with a tinker toy set, just trying out things and saying, “Wow, that worked!”
Whilst Saul’s instincts are amazing and timing usually impeccable and with sound logic, I wanted to pick up on this.
The tinker toy set
In bound marketing is one of the most critical functions of ecommerce and internet marketing and marketing funnels today. If you aren’t in the ecommerce or internet marketing space then you need to understand how fundamental it is for online business in order to be a qualified investor with a basic level of understanding. It is anything but a tinker toy set and is a fundamental cornerstone to the internet economy. If HubSpot corners this market with a best of breed platform for inbound marketing then that is a major business franchise.
The bunch of kids
Ok they look young and sound young. But I’ve met some and they are smart, educated, motivated, well engaged employees in classy offices in key global hubs.
I really felt this was an unfair description and inadequate assessment of HUBS as as stock.
Like I said they will probably announce a black swan tomorrow and Saul will be vindicated with his perfect timing, however for once I feel that this was less than incisive analysis driving this.
Ant
I wanted to go back to Saul’s point.
'They sound to me like a bunch of kids with a tinker toy set, just trying out things and saying, “Wow, that worked!”
Whilst Saul’s instincts are amazing and timing usually impeccable and with sound logic, I wanted to pick up on this…
I really felt this was an unfair description and inadequate assessment of HUBS as as stock.
Like I said they will probably announce a black swan tomorrow and Saul will be vindicated with his perfect timing, however for once I feel that this was less than incisive analysis driving this.
Hi ant,
That’s a fair criticism, and I guess I was just being impressionistic. I suspect that it’s much more likely that they will just keep growing than that a black swan will hit them. They just didn’t seem to be worth a 12% position, up with others like Shopify, Alteryx, Arista, Nutanix, Square, Nvidia. So I cut back on the size of my position.
I think it was the tone of the CC. Apparently what they’ve done is decided to put their whole basic solution out there as a freemium, and then hope to sell upgrades to all the people coming in on the free program. That’s a major change, and makes me wonder if they did that in response to sales resistance. They rationalized it by saying it cut down on sales costs, etc, and it may work just fine. That just didn’t seem like the clarity and power of the vision of six companies I referenced above.
Saul
They just didn’t seem to be worth a 12% position
And lest we fail to keep in mind, no one can hold more than 8 12+% positions (8 × 12 = 96)…and even holding 5 12+% positions would likely be quite unusual.
That is a very John Madden-esque observation, but seems relevant to this discussion.
And lest we fail to keep in mind, no one can hold more than 8 12+% positions* (8 × 12 = 96)…and even holding 5 12+% positions would likely be quite unusual.
*Excluding margin (which is recommended to be avoided at anything above a low-ish single digit percentage)
That leaves her with picks like Clorox, a good solid non-cyclical home products company that will probably do a decent job of protecting her capital which is her primary stated investment priority.
Boring old Clorox is an 85-bagger over the past 40 years, fwiw.
Boring old Clorox is an 85-bagger over the past 40 years, fwiw.
Great point Najdor…now tell me…what is the next Clorox?