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Marketing Change Tidal Wave

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June 19, 2015 – Comments (0) | RELATED TICKERS: HUBS , LAD

Board: Weekly Analysis Club

Author: okapimoon

First a few miscellaneous upfront analysis housekeeping points --- related things that came up as I researched that aren't specifically part of the HUBS report, but which came up for me through the HUBS research and are tangentially related to the weekly analysis.

First, Neil, since you congratulated me on my LAD post of the day I can tip my hat back to you and congratulate you are your review of ONE gathering post of the day!

Next (also for Neil), just wondered, when it is you might reveal to us the general bucket you're randomly choosing each week's study stock from. It's turning out to be an very interesting assortment. I especially found the contrast between last week's choice of LAD and this week's HUBS to be of particular interest. That's because in researching LAD last week, one thing that I thought and wondered about, but did not bring up in my report (though I did think about up to the point where I almost added an later additional post with comment) is that auto industry and auto sales, in general, operates on a very old school model. This of course is changing slowly, with the birth of new kinds of energy efficient cars, and different model resalers. But LAD, although it does have is own unique niche, is not one of those. It is still fairly traditional. And I wondered if they would be changing to adapt to quickly transformative more connected world, of if they were in danger of falling behind because they are more rooted in the traditional.

While I did not end up addressing that, this week you toss in a totally disruptive company whose entire mission is to change the face of marketing to adapt to the new way people connect, research, buy, sell, advertise to update and match marketing to fit that new world so swiftly developing in every area of business. Interesting!

Another connection that came up for me regarding the different tickers you've tossed out that I found interesting. Michael Simon, the CEO of LOGM, is on the board of directors of HUBS. Where are you getting these companies from?

Next "housekeeping" (for lack of a better term) point --- I was at a real loss for how to work through the formula Ears was "tutoring" me on after LOGM to figure out ROIC. Since HUBS has recently IPO'ed and is pouring money into developing the business quickly, first problem was finding average total equity. Well not a problem finding the number, but finding the equity really! 2014 total equity 110,699, but 2013 (93,248) so average was only 8725. Okay, well, let's divide that into effective tax rate anyway, and see what we have. But couldn't find any income tax. Apparently, income is so low due to all the money being poured back into company taxes have been deferred. I couldn't figure out how to do it. However, Schwab helped me out and claimed ROIC is (-66.61%) Not quite sure how to evaluate a company that is growing like wildfire (see figures below in report) but has negative EPS because the growing revenue is being poured into future growth. However, I can guess that if Ears didn't like LOGM's 4% ROIC, he's sure not going to like HUBS -66.61%.

Some other minuses [All figures from Schwab]:

Return on Assets: -38.29%
Return on Equity: -256.06
Operating Profit Margin: -38.97
Net Profit Margin: -38.21

A few positives:
Gross Profit Margin: 69.2
Sales Growth - 5 year: 77.29%
Cash per share: 4.21
Tangible Book Value/share: 3.78
Enterprise Value: 1.55B

(I'm also guessing this one wouldn't pass the "Saul Test" (though at least in terms of revenue, that is growing beyond 20%.

Still, I'm not really sure how to evaluate a company in this situation. But, we'll get to that later. First, a few more facts and figures to paint a better picture in order to make a report.

HUBS [Company Hubspot]

Shah owns 6.3% of the company stock, Halligan 3.4%)

Some [Overview] Figures from Company Presentation

Revenue Growth:
2009: 6.6M
2010: 15.4M
2011: 28M
2012: 51.6M
2013: 77.6M
2014: 115.9M
2015: Estimated 167M

Customer Growth:
2006: 3
2007: 48
2008: 317
2009: 1150
2012: 3855
2011: 5783
2012: 8159
2013: 10,111
as of Q2 2014: 11,624

(92% of revenue is earned on a subscription basis)

More Numbers

Annual Non-Gaap EPS
2014: -2.77
2015: -.97

Quarterly Non-Gaap EPS
2014 Q3: -1.62
2014 Q4: -.25
2015 Q1: -.18
2015 Q2: Estimated: -.21

Final Thoughts
Hubspot customer satisfaction appears to be high. Effectiveness of their platform appears to be high. Inbound Marketing appears to be a transformative industry and has a huge growth trajectory with marketing theses moving from cold calls, mailers, email campaigns, pounding the pavement in search of leads, and all old school methods to providing content and solutions, connecting via social media, linking via contacts, etc. in much the way advertising itself is shift from off to online. Hubspot has an effective, and dedicated founder staff who love what they do and are excited both to share it and to help others use their program to grow their own businesses. There are approximately 3 million mid-market businesses in North America and Europe and in terms of paying customers, the company has barely scratched the surface. There is competition in the field, Hubspot is not the only one, I believe their product may be like the Tesla of the Inbound Marketing industry. And if not the best, at least up in the top range. But, as one review concludes: "The main risk to the thesis is currently the valuation, since the market is counting on the company to continue to grow at a rapid pace and a top line growth deceleration might lead to a contracting P/S ration and result in a correction of at least 20%-30%."

Conclusion
I think HUBS is a very exciting company right on the cusp of what will continue to be a tidal wave of change in marketing. I think the founders and owners are deeply invested in creating a product that creates value for the company, its shareholders, and especially, its customers. They are continuing to innovate and I anticipate the company continuing to grow and for the negative earnings to catch up as the company grows. I think investing investing at the current time provides both a great deal of potential and as well as risk and personally would only feel comfortable with a small speculative investment at this time. However, I think this is a company that could become a behemoth in the industry and I would keep my eye on it.

Although I really was not sure how to evaluate a company at this stage of its growth and with the kind of negative/positive financials it shows (besides saying, "hey, no profit, no way") (maybe Ears can elaborate on that?), still, I'd give it a risky 4 right now.

okapimoon 

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