Over the last six months, HubSpot’s shares have sunk to $519.80, producing a disappointing 9% loss - a stark contrast to the S&P 500’s 18.6% gain. This might have investors contemplating their next move.

Given the weaker price action, is now the time to buy HUBS? Find out in our full research report, it’s free.

Why Does HubSpot Spark Debate?

Born from the idea that traditional interruptive marketing was becoming less effective, HubSpot (NYSE: HUBS) provides an integrated platform that helps businesses attract, engage, and manage customer relationships through marketing, sales, service, and content management tools.

Two Things to Like:

1. Billings Surge, Boosting Cash On Hand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

HubSpot’s billings punched in at $814.3 million in Q2, and over the last four quarters, its year-on-year growth averaged 21.3%. This performance was impressive, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

2. Elite Gross Margin Powers Best-In-Class Business Model

Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

HubSpot’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an elite 84.6% gross margin over the last year. Said differently, roughly $84.55 was left to spend on selling, marketing, and R&D for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. HubSpot has seen gross margins improve by 1.4 percentage points over the last 2 year, which is solid in the software space.

One Reason to be Careful:

Operating Margin Rising, Profits Up

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Over the last two years, HubSpot’s expanding sales gave it operating leverage as its margin rose by 1.2 percentage points. Although its operating margin for the trailing 12 months was negative 2.5%, we’re confident it can one day reach sustainable profitability.

Final Judgment

HubSpot has huge potential even though it has some open questions. After the recent drawdown, the stock trades at 8.2× forward price-to-sales (or $519.80 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.

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