As discussed here, if you want to have winning stock pitches, you need to nail the How Do They Make Make Money question. Here is an example of one I put together for Hubspot stock HUBS 526.66 -4.94 -0.93%. Yes, for a 5-page stock pitch it would be shorter, but given that I had an entire blog post to work with here, I thought I would try to be a bit more comprehensive.
Introduction
HUBS is a Software-as-a-Service (SaaS) business founded in 2006 by Brian Halligan and Dharmesh Shah. It IPO’d in 2014 (HUBS S-1). The company’s first product was Marketing Hub, which was based on a growth strategy for digitally-oriented SMB businesses that the founders literally wrote the book on, called Inbound Marketing. HUBS’ product offerings have expanded over time, and today the company sells a cloud-based software platform with a suite of 5 applications that help about 170,000 small enterprises operate and grow by leveraging HUBS’ digital infrastructure.
The apps all work together from a shared, CRM database that easily integrates with outside products. HUBS charges recurring monthly subscription fees for this service. Customers usually start with free products and transition to paid as they pursue more functionality and need to accommodate more data as they grow. A company of any size can, in minutes, simply put the charge on a personal credit card or set up a monthly ACH autopayment and then manage it via their account login. Simple, lots of high gross margin recurring revenue, and a dreamy working capital position for HUBS!
What’s The Job-To-Be-Done that HUBS Is Hired For?
The below excerpt is taken from HUBS’ first conference call as a public company in 2014. It captures the essence of the Franken-system problem Halligan describes, which they are still helping solve today:
Brian Halligan HubSpot, Inc. – Co-Founder, Chairman and Chief Executive Officer:
I want to say a brief word about what HubSpot is, as some of you may be new to our story.
HubSpot’s an inbound marketing and sales software-as-a-service company based in Cambridge, Massachusetts. We started HubSpot because we noticed that the traditional marketing playbook was broken. Email blasts were blocked by spam protection. Cold calls were blocked by caller ID. TV ads were blocked by DVRs, et cetera, et cetera. Humans had radically changed the way they shop and bought products, and HubSpot’s vision was to help companies transform the way they go to market to match the way humans actually behave.
The road to transform your marketing without using HubSpot, a company would have to buy blogging software, a new website, search engine optimization software, social media management software and marketing automation software and then have a team of IT people try to glue it all together. We call this a Franken-system. What HubSpot does is, not only teach companies how to transform their marketing, but gives them an all-in-one system to enable mere mortals to pull this type of marketing off: one platform to learn, one phone number to call, one payment to make and one password to remember.
Here’s a youtube link to a short interview with Brian Halligan from 2019 where he discusses the company’s history and its mission.
What’s HUBS Selling?
Here are the five apps, or “hubs” as the company calls them, which comprise the essence of HUBS’ product offering, aka its platform:
Below are the basics of each, including hyperlinks to the company’s detailed product descriptions. Text in quotes was taken directly from the “Our CRM Platform” section of the Hubspot 2022 Annual Report:
- Marketing Hub – This was the company’s first product and still comprises the biggest chunk of the company’s revenue today. “Marketing Hub is an all-in-one toolset for marketers to attract, engage, and nurture new leads towards sales-readiness over the entire customer lifecycle. Features include marketing automation and email, social media, SEO, and reporting and analytics.” If you have never sold a DTC product or sought to drive traffic to your content on the Internet, this stuff sounds like gobbly goop, but the fact is this is very real stuff for any web-based business and increasingly, businesses of all types. The products help create and track relationships with potential customers in any/every way possible (e.g., search engine queries, website visits, email) to convert them to payers and keep them paying. Here’s a simple 10-minute video on Marketing Hub.
- Sales Hub – “Sales Hub is designed to enhance the productivity and effectiveness of sales teams. Businesses can empower their teams with tools that deliver a personalized experience for prospects with less work for sales representatives. Features include: email templates and tracking, conversations and live chat, meeting and call scheduling, lead and website visit alerts, lead scoring, sales automation, pipeline management, quoting, forecasting, and reporting.”
- Service Hub – “Service Hub is our customer service software designed to help businesses manage, respond and connect with customers. Features include: conversations and live chat functionality, conversational bots, tickets and help desk, automation and routing, knowledge base, team emails, feedback and reporting tools, and customer goals.” For this product, think of a DTC seller that deals with customer service inquiries, returns/payment disputes, technical problems, etc. All of the seller’s customer interactions occur and are tracked and analyzed in this hub. Video.
- Content Management System Hub – “Our content management system (“CMS”) Hub combines the power of customer relationship management and a content management system into one integrated platform. Our content tools enable businesses to create new and edit existing web content while also personalizing their websites for different visitors and optimizing their websites to convert more visitors into leads and customers. Features include: website pages, business blogging, smart content, landing pages and forms, SEO tools, forms and lead flow, web analytics reporting, calls-to-action, and file manager.” Simply put, HUBS helps users create blogs or e-commerce websites – that they might otherwise create on some of the well-established content platforms like Squarespace, Wix, or WordPress – very quickly and easily and most important, fully integrated with the other hubs that the customer is running. Here’s the video on the CMS hub, and an example of a HUBS blog post on how to start a blog.
- Operations Hub – “Operations Hub is designed to help businesses unify customer data in a connected platform, automate business processes, and eliminate time-consuming data cleanup, and query and transform data to enable customer insights and connections. Features include: programmable automation, data sync, data curation, and data quality tools.” Anyone who has worked inside an operating business of any scale knows that they spend way too much time gathering data the data they need to make strategic decisions, and the idea here is to make this easy and fast.
At the core of all the hubs is a CRM database – it ties everything together, and once a company is on it, it can use new products and functionality as soon as HUBS pushes them to production. From the Hubspot 2022 Annual Report:
The core of our CRM Platform is a single database of lead and customer information that allows businesses to track their interactions with contacts and customers, manage their customer activities, and report on their pipeline and sales. This allows a complete view of lead and customer interactions across all of our integrated Hubs, giving our CRM Platform substantial power. This integration makes it possible to personalize every aspect of the customer interaction across web content, social media engagement, and email messages across devices, including mobile.
This makes the HUBS products very sticky, driving recurring revenue and tremendous operating leverage for the company as they expand their offerings.
It’s also important to highlight that running through all of these products are artificial intelligence and payment processing capabilities, which are just getting going now but probably have a lot to do with where the product offerings and earnings of HUBS are going in the future. Since a stock’s intrinsic value is a reflection of future earnings power, these topics have a lot to do with HUBS’ valuation today, and in fact, recent investor enthusiasm for AI has been cited as the reason for a run-up in tech valuations over the past few months. Links here to a conference and an earnings call in which HUBS describes its thinking on AI and its initiatives in the area.
Some Revenue Numbers
This post is not about the financial analysis or valuation of HUBS, but here are some numbers from the 2021 Analyst Day showing approximate sales levels for each hub:
Hubspot Annual Recurring Revenue (ARR) By Hub – 2021
| Hub | ARR ($mm’s) |
| Marketing | 840 |
| Sales | 290 |
| Service | 60 |
| CMS | 45 |
| Operations | 8 |
| Total | 1,243 |
Pricing
HUBS charges around $15 to $3,500 per month to businesses, based on the number of users and number of hubs used. Here is an example of pricing for their highest-selling product, Marketing Hub – you can see the pricing of the other hubs on their respective sell sheets in the next section.
Per HUB’s 1Q23 earnings call gross retention percentage is in the high-80s, and net retention is about 107%. Growth investors heavily focus on retention rates, but that is beyond the scope of this post, where we are just trying to get a flavor for the business.
How Are The Hubspot Products Sold?
Per the 2022 Analyst Day, 39% of sales occur through solutions partners (agencies that earn commissions when they sell HUBS products to clients), and 61% are direct to the customer. Direct is comprised of inbound marketing (heavy emphasis on product-led growth) and inbound direct sales, which involves sales representatives.
Readers are likely familiar with sales funnels and how they work, but there is a lot on the Internet about them for those who don’t. HUBS excels at getting customers to love and depend on their free products via inbound marketing and then trading up to paid products – and more of them – over time (aka conversion). You can get a sense of this dynamic by looking at the sell sheet links below for each of the five apps. They list the functionality of the free (“free” or “starter” tools”) vs. paid (“premium edition, “professional,” or “enterprise level”) versions of each of the hubs. HUBS is very strategic about the feature mixes as a means of moving users from the left to the right columns on these sheets to grow revenue from existing users.
Sell Sheet Links:
In addition to converting free users to paid, HUBS wants to sell existing users more hubs over time. This is a big part of its growth story. There is a lot going on in the slide below from the HUBS 2021 Analyst Day, but it’s worth taking a quick look at:
The point is that from 2017 to 2021, more HUBS customers are using multiple HUBS, and the company has also been successful in getting more customers to start with HUBS other than Marketing Hub, which indicates the appeal and therefore market for other HUBS products is widening.
By now, you should have a pretty good idea of what HUBS does, allowing you and ultimately your readers to focus on other aspects of the stock pitch, like competitors, growth drivers, valuation, and downside risks.
In the next post, I will focus on HUBS’ ROIC calculation, adjust it for intangible investment, and take a look at how LTV/CAC ties into marginal productivity of capital, as these are highly relevant issues for evaluating Hubspot stock.
Also, be sure to check out Inbound, an annual conference that HUBS runs where you can learn a ton about the business and meet lots of customers, partners, and HUBS managers. A stream of the conference (September 5th – 8th, 2023) and presentation materials can be found here.
Quick Links
Recent Interview With Dharmesh Shah
Link to the Clouded Judgment blog showing some discussions of HUBS and SaaS companies in general