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You own a small store. You need a website and to be able to control your Facebook, twitter, and email blast campaigns. You can pay them to build a website. Once you do that everything that you need to control your website, Facebook, twitter, and emails will then be controllable from their one platform. Before you would have to login to each website separately.
They also provide on of the best analytics services. So in the platform you can see exactly how many people are interacting with your business online, either email, website, or social media.
In conjunction with this announcement, HubSpot will host a conference call on Wednesday, November 12, 2014 at 5:00 p.m. Eastern Time (ET) to discuss the company's third quarter financial results and its business outlook. To access this call, dial (877) 201-0168 (domestic) or (647) 788-4901 (international). The conference ID is 17069448. Additionally, a live webcast of the conference call will be available in the "Investor Relations" section of the Company's web site at https://ir.hubspot.com/.
HubSpot went public in a highly successful public debut, amidst difficult market conditions.
The company demonstrates rapid growth, and recently managed to narrow its losses slightly.
Despite this, I remain very cautious amidst the premium valuation, losses and potential impact of competition or changes in technology.
HubSpot (NYSE:HUBS) provides cloud-based marketing and sales software enabling businesses to improve their inbound marketing operations online. The company witnessed a successful public debut in what has been a very difficult and volatile week in which the company has chosen to make its public debut.
Investors still liked the offering, sending shares higher on top of the already strong preliminary pricing. Yet while growth is attractive, the losses and lack of key differentiating factors are not attractive in my opinion, warranting my cautiousness.
The Public Offering
HubSpot's software platform exists out of a range of applications which help businesses to attract visitors onto their website, convert this traffic into leads, and close sales or make visitors promoters of the business.
The company aims to differentiate the marketing experience by offering more relevant and personalized advertising, while using less annoying marketing and sales tactics versus traditional solutions. The company offers a range of integrated applications to achieve these goals, including search engine optimization, social media, content management, e-mail and analytics, to name a few solutions.
As of June, the company offered these kind of solutions to more than 11,600 customers which are located in some 70 countries, being spread across industries.
The company sold 5 million shares for $25 apiece, thereby raising $125 million in gross proceeds. All of these shares were sold by the company with no shares being offered by selling shareholders.
Shares were offered above the midpoint of the preliminary offering range of $22-$24 per share. At the public offering price of $25, with some 30.4 million shares outstanding, equity is valued at $760 million.
Banks which aided the company in its process to become a public firm were Morgan Stanley, J.P. Morgan, UBS, Pacific Crest, Canaccord Genuity and Raymond James.
Valuation
HubSpot offers its services as a subscription based offering, focusing on mid-market companies. From the more than 11,600 customers which the company had at the end of the second quarter of this year, the company generates average annual revenue per customer of little more than $8,800. The company cites the large opportunity with just a very low percentage of European and US mid-market companies having implemented any kind of automated marketing.
For the year of 2013, HubSpot posted sales of $77.6 million which marked a 50.4% increase compared to the year before. Net losses nearly doubled to $34.2 million in the meantime.
Growth continued in the first six months of this year, as sales were up by 46.2% to $51.3 million. Despite the growing sales, losses kept increasing as well although the increase was rather modest. HubSpot posted a loss of $17.8 million versus the $16.4 million reported in the year before.
Ahead of the offering the company held some $7 million in cash and some preferred convertible stock which will be converted into common shares at the offering. Including the $125 million in gross proceeds, the company will operate with a net cash position of some $120 million in all likelihood.
At $29 per share, the market values the company at around $880 million, or operating assets around $760 million after subtracting the net cash holdings. Assuming a current run rate of revenues of little above $110 million, shares trade around 7 times revenues as losses remain substantial.
Investment Thesis
As noted above, the public offering of HubSpot has been a great success. For starters, the shares were offered nearly 10% above the midpoint of the latest preliminary offering range after which shares rose all the way towards $33 on their opening day. Ever since, share have fallen towards the $30 mark, still valuing shares some 20% over the final offering price of $25.
Investors are attracted to the rapid growth, being forgiving about the losses which are reported at the moment. Second-quarter sales rose 47.8% on an annual basis to $27.1 million. It is also encouraging that losses of $8.3 million were slightly narrower compared to the first quarter and the second quarter of last year. So far the positive news, as other risks are still very much apparent including the still high pace of losses, intense competition, reliance on key staff and the fact that the effectiveness of its solutions may change depending on third parties.
As such I am quite hesitant to justify the steep current valuation based on the current performance, although growth rates of close to 50% remain attractive. Given the lack of a structural competitive advantage, the declining growth, and the still sizable losses, I am not willing to pay these kind of revenue multiples at this point in time. Consequently, I will be watching the action from the sidelines for now.
HubSpot offers an opportunity to participate in the growth of inbound marketing.
HubSpot has a large addressable market and the company is growing revenues at a rapid pace while incurring losses.
IPO proceeds should help accelerate the top line growth in the next couple of quarters.
Initiating HubSpot with a buy rating with at least 25% potential upside.
HubSpot (NYSE:HUBS) had a successful IPO in early October and the stock is up more than 30% from its offering price. The company is delivering robust revenue growth while incurring losses, a practice that is expected to be continued in the following years. Given the prior success of SaaS companies in the stock market and their respective valuations, I believe that HubSpot is going to reward its long-term shareholders. I am starting HubSpot with a buy rating and a $42 price target.
Company and industry overview
HubSpot provides a cloud-based marketing and sales software platform that enables businesses to deliver an inbound experience. "An inbound marketing and sales experience attracts, engages and delights customers by being more relevant, more helpful, more personalized and less interruptive than traditional marketing and sales tactics" - according to HubSpot's SEC filings. The company's integrated applications include social media, search engine optimization, blogging, website content management, marketing automation, email, CRM, analytics and reporting.
HubSpot is the leading brand in the cloud-based inbound marketing and sales software industry and has the largest social media following in the industry. As of June, 2014, the company had 11,624 customers in more than 70 countries. The platform is sold on a subscription basis and revenues have grown rapidly from $6.6 million in 2009 to $77 million in 2013. However, the company had net losses of $18.8 million in 2012 and $34.3 million in 2013, and management expects to continue to incur losses in the future in order to grow the business.
The transformation in marketing and sales has created a large market opportunity for HubSpot. The company focuses on selling its platform to mid-market businesses. According to AMI Partners, in 2013, there were 1.6 million of these mid-market businesses with a website presence in the United States and Canada and 1.3 million in Europe. HubSpot obviously has a large market to penetrate into, since it had just over 11,000 customers at the end of Q2 2014. The use of inbound marketing is intended to be more helpful, more relevant and less interruptive to customers, and we should see an increased use of these methods in the future, especially considering the rise of social media and the importance of brand building on the web. In addition to having the largest social media following in the industry and a strong brand, HubSpot also has a large and growing agency partner program with more than 2,000 marketing agency partners worldwide which help with promotion and enhance the company's reach to new mid-market businesses at scale.
Higher retention rates and rising revenue per user
HubSpot's number of customers has doubled from the end of 2011 to 11,624 at the end of Q2 2014. Revenue per user has also grown considerably in the meantime and continues to trend higher, but the customer acquisition costs have grown as well and stand above the average revenue per user. However, those customer acquisition dollars were spent wisely as the retention rates have improved significantly in the last three years (see table below). It is also evident that the customer acquisition costs have slowed down in the first six months of 2014 while the average revenue per user growth rate has exceeded the customer acquisition costs.
