Rating Update: Stock Rating F-Lowest (12/2/19)-HubSpot Inc (HUBS).

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BUSINESS

HubSpot, Inc. provides a cloud-based marketing and sales software platform for businesses in the Americas, Europe, and the Asia Pacific. Its software platform includes integrated applications, such as social media, search engine optimization, blogging, Website content management, marketing automation, email, sales productivity, CRM, analytics, and reporting. The company also offers professional, and phone and email-based support services. It serves mid-market business-to-business, and B2B companies. The company markets its product through inbound go-to-market approach, marketing agency, and sales partners. HubSpot, Inc. was founded in 2005 and is headquartered in Cambridge, Massachusetts.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, HUBS is expected to continue to be an important Value Builder.

HubSpot has a current Value Trend Rating of F (Lowest Rating).
The Value Trend Rating reflects inconsistent signals from PTR’s two proprietary measures of a stock’s attractiveness. HubSpot has a neutral Power Rating of 41 but a very low Appreciation Score of 5, resulting in the Lowest Value Trend Rating.

HubSpot’s stock is selling significantly above targeted value. The current stock price of $146.79 compares to targeted value 12 months forward of $34.
HubSpot’s very low appreciation potential results in an appreciation score of 5 (95% of the universe has greater appreciation potential.)
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HubSpot has a Power Rating of 41. (This neutral Power Rating indicates that HUBS’ chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: is in a slightly weakened position current; and recent price action has been slightly unfavorable. An offsetting factor is earnings estimate behavior for HUBS has been slightly favorable recently.

INVESTMENT PROFILE

HubSpot’s financial strength is average. Financial strength rating is 59.
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Relative to the S&P 500 Composite, HubSpot Inc has slightly more Growth than Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that HUBS is normal risk. High expected growth is a positive for HubSpot. Relative weaknesses include: low historical profitability, low financial strength, and low historical growth. HubSpot’s valuation is high: low dividend yield, high P/E ratio, and high price/book ratio. HUBS has unusually low market capitalization.

CURRENT SIGNALS

HubSpot’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.

HubSpot’s current technical position is very weak. The stock price is in a 2.6 month down move. The stock has declined 23.0% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Positive development: the consensus estimate for December, 2019 increased significantly. Negative development: the consensus estimate for December, 2020 decreased significantly.
The stock is currently rated F.
HubSpot Inc (NYSE: HUBS) stock closed at $0.02 on 12/2/19 after a major increase of 77.4%. NORMAL trading volume accompanied the advance. The stock has risen 1.5% during the last week but has been weak relative to the market over the last nine months.

CASH FLOW

In 2018, HubSpot generated a significant increase in cash of +$88.32 million (+17%). Sources of cash were larger than uses. Cash consumed from 2018 EBITDA totaled -$22.13 million. Non-operating sources contributed +$4.99 million (-23% of EBITDA). Cash taxes consumed -$1.87 million (+8% of EBITDA). Withdrawal of investment from the business totalled +$11.03 million (-50% of EBITDA). On a net basis, debt investors pulled out -$1.80 million (+8% of EBITDA) while equity investors furnished +$98.11 million (-443% of EBITDA).
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HubSpot’s Non-operating Income, %EBITDA has suffered a strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Hubspot Inc Peer Group. (Since 2016 Non-operating Income, %EBITDA has accelerated sharply.) In most years, HubSpot was in the third quartile. Currently, HubSpot is lower quartile at -23% of EBITDA (+$4.99 million).

HubSpot’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Hubspot Inc Peer Group. In most years, HubSpot was in the top quartile. Currently, HubSpot is upper quartile at +8% of EBITDA (-$1.87 million).

HubSpot’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Hubspot Inc Peer Group. In most years, HubSpot was in the top quartile. Currently, HubSpot is lower quartile at -50% of EBITDA (+$11.03 million).

HubSpot’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Hubspot Inc Peer Group. In most years, HubSpot was in the third quartile. Currently, HubSpot is slightly above median at +8% of EBITDA (-$1.80 million).

HubSpot’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Hubspot Inc Peer Group. In most years, HubSpot was in the lower quartile. Currently, HubSpot is below median at -443% of EBITDA (+$98.11 million).

HubSpot’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Hubspot Inc Peer Group. In most years, HubSpot was in the lower quartile. Currently, HubSpot is substantially below median at -399% of EBITDA (+$88.32 million).
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HubSpot’s Cash, %Revenue has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Hubspot Inc Peer Group. (Since 2016 Cash, %Revenue has accelerated very sharply.) In most years, HubSpot was in the lower quartile. Currently, HubSpot is above median at +116%.

PROFITABILITY

HubSpot’s operating performance since 2013 is unavailable.
The productivity of HubSpot’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend that accelerated sharply after the 2016 level.
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HubSpot’s return on equity is upper quartile (-8.7%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is upper quartile (-3.6%) reflecting asset turnover that is below median (0.43X) and above median pretax margin (-8.3%).
Tax “keep” rate (income tax management) is above median (104.3%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is lower quartile (2.35X).

GROWTH RATES

There are no significant differences between HubSpot’s longer term growth and growth in recent years.
HubSpot’s historical income statement and balance sheet growth are not available.

Annual revenue growth has been 12.8% per year. (More recently it has been 33.8%.)

Total asset growth has been 32.2% per year. (More recently it has been 48.9%.)

Annual E.P.S. growth is not available.

Equity growth has been 31.6% per year. (More recently it has been 62.0%.)

HubSpot’s consensus growth rate forecast (average of Wall Street analysts) is 43.2% — substantially above the average of the historical growth measures.
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Relative to the Hubspot Inc Peer Group, HubSpot’s historical growth measures are highly erratic. Total asset growth (32.2%) has been at the upper quartile. Equity growth (31.6%) has been above median. Revenue growth (12.8%) has been below median. E.P.S. growth is unavailable.

Consensus growth forecast (43.2%) is at the upper quartile.
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PRICE HISTORY

Over the full time period, HubSpot’s stock price performance has been exceptional. Between December, 2014 and December, 2019, HubSpot’s stock price rose +337%; relative to the market, this was a +189% gain. Significant price move during the period: 1) December, 2016 – September, 2018: +221%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 14.3% is slightly below median relative to the S&P 500 Composite.
In addition to being slightly below median relative to S&P 500 Composite, current annual total return performance through October, 2019 of 14.3% is substantially below median relative to HubSpot Inc Peer Group.

Current 5-year total return performance of 34.2% is upper quartile relative to the S&P 500 Composite.
Through October, 2019, with upper quartile current 5-year total return of 34.2% relative to S&P 500 Composite, HubSpot’s total return performance is substantially above median relative to HubSpot Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, HUBS’ overall valuation is exceptionally high. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/revenue is upper quartile. Ratio of enterprise value/assets is upper quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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HubSpot has a large value gap compared to the median valuation. For HUBS to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 9.34X to 10.85X. If HUBS’ ratio of enterprise value/revenue were to rise to 10.85X, its stock price would be lower by $22 to $169.
For HUBS to hit lower quartile valuation relative to the HubSpot Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 9.34X to 7.72X. If HUBS’ ratio of enterprise value/revenue were to fall to 7.72X, its stock price would decline by $-24 from the current level of $147.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, HUBS is expected to continue to be an important Value Builder.
HubSpot’s current Price Target of $35 represents a -76% change from the current price of $146.79.
HubSpot’s very low appreciation potential results in an appreciation score of 5 (95% of the universe has greater appreciation potential.)
With this low Appreciation Score of 5, the neutral Power Rating of 41 results in an Value Trend Rating of F.
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HubSpot’s current Price Target is $35 (+34% from the 2018 Target of $26 but -76% from the 12/02/19 price of $146.79). This dramatic rise in the Target is the result of a +61% increase in the equity base and a -17% decrease in the price/equity multiple. The forecasted increase in growth has a very large positive impact on the price/equity multiple and the forecasted increase in return on equity has a very slight positive impact as well. More than offsetting these Drivers, the forecasted increase in cost of equity has a very large negative impact.
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PTR’s return on equity forecast is 16.5% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2013 and 2018. The current forecast is significantly above the 2016 low of 4%.

PTR’s growth forecast is 23.0% — substantially above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2013 and 2018. The current forecast is significantly above the 2017 low of 2%.

PTR’s cost of equity forecast is 11.3% — slightly above recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2014 and 2018. The current forecast is well above the 2016 low of 4.9%.
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At HubSpot’s current price of $146.79, investors are placing a positive value of $90 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 9.0% per year, and a return on equity of 16.5% versus a cost of equity of 7.7%.
PTR’s 2020 Price Target of $35 is based on these forecasts and reflects an estimated value of existing assets of $55 and a value of future investments of $-21.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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