HubSpot Has Strong Fundamentals, But Upside Is Largely Priced In, Says Morgan Stanley

HubSpot Inc HUBS, a developer of software products for inbound marketing and sales, is an unique software asset, combining growth, profitability and a strong executive, according to Morgan Stanley.

The Analyst

Morgan Stanley analyst Stan Zlotsky downgraded shares of HubSpot from Overweight to Equal-weight, primarily due to valuation concerns, and raised the price target for the shares from $98 to $105.

The Thesis

Much of the near-term upside in HubSpot shares has already been captured following nearly a 100-percent move in the stock over the past 12 months, with 40 percent of the move made over the past four months, Zlotsky in a Tuesday note.

The strong runup is partly due to an industrywide rally in the SaaS group and partly due to HubSpot's sustained growth and better-than-expected profitability, the analyst said. 

A large, $28-billion total addressable market supports a long runway of growth ahead, Zlotsky said. The analyst said he sees expansion opportunity from the company's foray into the customer service market with the introduction of Customer Hub in 2018.

That said, Morgan Stanley sees limited margin expansion into 2018, given the increase HubSpot envisions for S&M and R&D investment for newer product offerings.

"At current trading levels, we view HUBS to be fairly valued at our revised $105 PT (up from $98), which implies 6.8x EV/CY19 Sales and 0.27x growth adjusted, a slight premium to SaaS peers at 0.25x that we believe is appropriate given sustainable revenue growth and long-term profitability profile," Zlotsky said. 

The Price Action

HubSpot shares have nearly doubled over the past year.

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Photo courtesy of HubSpot.