Shareholders of HubSpot would probably like to forget the past six months even happened. The stock dropped 53.4% and now trades at $207.40. This may have investors wondering how to approach the situation.

Following the pullback, is now a good time to buy HUBS? Find out in our full research report, it’s free.

Why Does HubSpot Spark Debate?

Born from the idea that traditional interruptive marketing was becoming less effective, HubSpot (NYSE: HUBS) provides an integrated platform that helps businesses attract, engage, and manage customer relationships through marketing, sales, service, and content management tools.

Two Things to Like:

1. Billings Surge, Boosting Cash On Hand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

HubSpot’s billings punched in at $971.4 million in Q4, and over the last four quarters, its year-on-year growth averaged 22.5%. This performance was impressive, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

2. Elite Gross Margin Powers Best-In-Class Business Model

Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

HubSpot’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an elite 83.8% gross margin over the last year. That means HubSpot only paid its providers $16.24 for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. HubSpot has seen gross margins decline by 0.6 percentage points over the last 2 year, which is slightly worse than average for software.

One Reason to be Careful:

Operating Margin Rising, Profits Up

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Analyzing the trend in its profitability, HubSpot’s operating margin rose by 2.8 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was breakeven.

Final Judgment

HubSpot’s merits more than compensate for its flaws. After the recent drawdown, the stock trades at 2.9× forward price-to-sales (or $207.40 per share). Is now a good time to buy? See for yourself in our in-depth research report, it’s free.

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