HubSpot (NYSE: HUBS) saw significant action in recent days as Google parent Alphabet reportedly dropped its plans to buy the company, according to a report by Bloomberg. With HubSpot set to continue as an independent entity, the stock fell by nearly 20% in the second week of July.
Now, investors should consider whether to buy the discounted shares. Let's examine whether a position in HubSpot can pay off for its shareholders.
The state of HubSpot
Admittedly, HubSpot's core competencies are of interest to media companies and businesses alike. HubSpot offers an inbound marketing tool for small and medium-size businesses. Rather than harassing customers with unwanted ads, HubSpot markets through content creation and information sharing.
This approach offers "freemium" content, differentiating itself from Salesforce and other customer relationship management tools. Between its free tools and paid platforms that cost as little as $20 per month, its technology is accessible to nearly any enterprise.
Additionally, it accomplishes many of its tasks through artificial intelligence (AI). AI helps its customers with functions such as writing emails, building customer lists, or creating reports.
It was likely such capabilities that initially attracted interest from a company like Alphabet. Still, according to anonymous sources, HubSpot and Alphabet had never conducted detailed discussions related to the due diligence of a potential deal.
Also, such a deal would have probably faced considerable regulatory scrutiny, as HubSpot's $24 billion market cap would have made it a major buyout. That factor alone reduces the odds of such a deal winning approval from regulators.
Where HubSpot goes from here
Nonetheless, the failure of such a deal may please HubSpot bulls. The stock is up more than 1,400% since its 2015 initial public offering, and despite more recent struggles, it has outperformed the S&P 500 over the last five years.
Also, the company continues to show robust financial growth. Revenue in the first quarter of 2024 was $617 million, a yearly increase of 23%. In comparison, revenue grew by around 25% in 2023.
Even though it lost money in 2023, it earned a net income of $5.9 million in Q1 2024. Admittedly, the operational losses continue, and the profit came from income from investment. Nonetheless, such improvements indicate that it is close to an operational profit.
Given the losses in past years, it does not have a P/E ratio. However, its price-to-sales (P/S) ratio of 10.3 places it below its all-time average sales multiple of 12 and near yearly lows. Such a valuation seems to validate that HubSpot indeed trades at a discount.
Consider HubSpot stock
Given HubSpot's current state, the recent sell-off looks like a buying opportunity in the software-as-a-service (SaaS) stock. Although the deal's failure prompted many investors to sell, it is clear that HubSpot's software meets a critical need for SMBs, leading businesses to spend more on its platform.
Moreover, its 10.3 P/S ratio takes the sales multiple close to a yearly low, allowing new investors to buy this stock at a discount. With this opportunity, investors can profit over time, and a lower price increases the likelihood it will outperform the S&P 500.
Should you invest $1,000 in HubSpot right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, HubSpot, and Salesforce. The Motley Fool has a disclosure policy.
