Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

HubSpot another grossly overpriced Software Stock

HubSpot Inc. (NYSE: HUBS) is another stock Mr. Market is grossly overpricing in the cloud bubble.

Mr. Market paid $523.33 for HubSpot (HUBS) shares on 17 February 2021. Yet HubSpot reported a quarterly operating loss of -$15.46 million on 30 September 2020. In addition, HubSpot reported quarterly revenues of $228.38 million and a quarterly gross profit of $185.78 million on the same day.

Thus, Mr. Market paid $523.33 for a company that looses money and had just $228.38 million in revenues. Incredibly, Barron’s claims HubSpot posted “blockbuster earnings” and “blowout results” on 11 February 2021.

The HubSpot Bubble

The blowout results and blockbuster earnings comprised a quarterly operating loss of -$7.6 million and quarterly revenues of $252.1 million, HubSpot’s quarterly results reveal. I think the only thing being blown at HubSpot (NYSE: HUBS) is the bubble its stock is in.

Over the past year, HubSpot’s share price rose from $196.62 on 16 February 2020 to $515.15 on 16 February 2021. Thus HubSpot’s share price grew by $318.53 in a year and it loses money.

I think this lunacy resembles the Dotcom Bubble at the turn of the 21st Century and the insane stock market of the 1920s. In particular, the boosterism of “journalists” such as those at Barron’s is reminiscent of the writers of the late 1920s.

Some observers sound the alarm. Michael Antonelli, market strategist at Baird Private Wealth Management, told Yahoo!Finance he fears the “growing consensus we’re in a boom.”

“Sentiment only works in extremes,” Antonelli told Yahoo! Finance. “One of the things I’m worried about next year is the notion of a boom, the notion of a ‘Roaring 20s.’”

So What is HubSpot?

So what is HubSpot (HUBS) anyway, and why did some investors think it is worth $518.52 a share on 16 February 2021?

HubSpot  uses a freemium; or free-to-play business model, to promote a cloud-based customer relationship management (CRM) platform. The CRM platform offers services similar to those Salesforce (NYSE: CRM) offers.

The difference is that HubSpot offers free access to some services to get customers hooked on its products. This is the freemium business model video game companies often use.

To explain, the term freemium is a mashup of the words “free and premium.” Essentially, a freemium is a pricing strategy in which a company offers basic product or service for free , but charges a premium for additional features and services.

Accordingly, HubSpot gives customers free access to sales, marketing, service, and CMS (content management software) hubs. Once in the hubs, the customers can buy additional services.

I think the hubs are popular because many sales and marketing professionals are working from home and in need of cloud-based CRM solutions. Many of those professionals go to HubSpot because some of its products are free. Thus, suspect the COVID-19 panic is driving HubSpot’s growth.

What Value Does HubSpot Offer?

HubSpot (HUBS) claims to have over 100,000 customers in over 120 countries.

In addition, HubSpot claims its blogs receive over seven million monthly visits. Plus, HubSpot claims over 330,000 certified professionals study at HubSpot Academy. HubSpot also claims to have over 2.6 million social media followers. There are over 150 HubSpot user groups and something HubSpot calls Inbound receives 26,000 registered users.

HubsSpot claims its customers include the World Wildlife Federation (WWF), Suzuki, SurveyMonkey, Trello, Soundcloud, Classpass, and Vmware.

I think the major attraction for investors at HubSpot is growth. HubSpot claims its subscription revenues grew by 36% to $244.3 million in the fourth quarter of 2020. Similarly, HubSpot estimates its annual subscription revenues grew by 32% to $853 million 2020.

Plus, HubSpot reports the total revenues grew by 35% to $252.1 million in the fourth quarter of 2020. Similarly, the total annual revenues grew by 31% to $883 million in 2020.

HubSpot claims its total customer base grew by 42% to 103,994 in 2020. However, HubSpot admits average per customer subscription revenue fell by 3% to $9,758 during the fourth quarter of 2020.

How Much Cash Does HubSpot Generate?

HubSpot (HUBS) reported a quarterly operating cash flow of $61.3 million in the fourth quarter of 2020.

The quarterly operating cash flow rose from $38.67 million in the third quarter of 2020 and $47.89 million in the 4th Quarter of 2019. However, Stockrow estimates HubSpot reported a negative quarterly ending cash of -$76.19 million on 30 September 2020. The quarterly ending cash flow fell from $45.22 million on 31 December 2019.

Notably, HubSpot reported six straight quarters of a positive financing cash flow on 30 September 2020. That means HubSpot’s borrowing exceeded its debt repayment. For instance, HubSpot’s quarterly financing cash flow fell from $207.69 million on 30 June 2020 to $4.12 million on 30 September 2020.

HubSpot had $474.05 million in long-term debt on 30 September 2020. The long-term debt grew from $340.56 million on 31 December 2019.

HubSpot had $1.282 billion in cash and equivalents on 31 December 2020. The cash and short-term investments rose from $1.1845 billion on 30 September 202 and $961.5 million on 31 December 2019.

I think HubSpot’s true value is minimal. For instance, it had Total Assets in $1.875 billion on 30 September 2020. The Total Assets grew from $1.569 billion on 31 December 2019.

Why HubSpot (HUBS) is a dangerous stock

I consider HubSpot (HUBS) a dangerous stock that ordinary people need to avoid because Mr. Market grossly overprices it.

I consider HubSpot is dangerous because of its ludicrous price. The unrealistic price is dangerous because it could collapse.

This does not mean HubSpot is a poor company that makes a lousy product. No, it is a company that Mr. Market overprices.

Remember, bubbles can inflate the share prices of excellent companies such as Amazon (AMZN) and Tesla (TSLA). Bubbles affect good and bad companies equally because emotion drives bubbles.

Why Investors Participate in Bubbles

Investors, including institutional investors, participate in bubbles, because of a fear of loss. The fear is that the investors could miss out on massive increases in stock prices if they do not buy now.

Bubbles are dangerous because bubble investors base their decisions on prices and nothing. Hence, bubble investors overpay for both a great stock such as Tesla Motors (NASDAQ: TSLA) and questionable companies such as HubSpot (HUBS). I consider HubSpot a questionable company because its current value is purely theoretical.

Investors need to avoid HubSpot because of the bubble and be leery of all cloud stocks. HubSpot shows that cloud and tech stocks are in a dangerous bubble that could collapse fast.