HUBS Stock: Can AI Accelerate HubSpot’s Customer Growth?

HubSpot [HUBS] is a Cambridge, Massachusetts-based customer relationship management (CRM) software provider. 

The company’s platform is used by companies to help customer service, marketing and sales teams to work together more efficiently. 

As of July 2024, HubSpot had the second-biggest share of the global CRM market, with 145,100 customers. Salesforce [CRM] was the market leader with 202,600, while Microsoft [MSFT] was third with 91,400 customers, according to a report from HG Insights. 

This stock spotlight will look at how HubSpot is leveraging artificial intelligence (AI) to improve its product offering, as well as how a recent acquisition could help to increase AI product monetization this year. It will also highlight concerns about its customer base. 

HubSpots Buys AI Conversational Platform 

On January 6, HubSpot completed the acquisition of AI-powered conversational platform Frame AI. The deal had been announced in December. 

Frame AI helps companies to transform unstructured data — such as calls, emails and meetings — into actionable insights. 

For example, marketing teams can use the platform to create personalized content for customers, while it allows sales teams to get a better understanding of their customers and identify the deals to prioritize. This helps to reduce customer churn and increase retention. 

“While structured data has long been the foundation of CRM, unstructured data — like conversations — holds the key to deeper insights into customer sentiment, behavior and intent,” HubSpot CEO Yamini Rangan said in the press release. 

The terms of the deal were not disclosed, but HubSpot stated in the initial press release that Frame AI would be integrated into its Breeze AI solutions across its product portfolio. Breeze was launched at the end of Q3. 

HUBS Stock Bounces Back 

While HUBS stock’s 12-month gain of 24.55% through January 13 may seem lackluster compared to other software stocks, it has climbed 60.78% to $699.14 from its 52-week low of $434.84, set on August 5. 

HUBS stock came under pressure after Alphabet [GOOGL] announced in July that it was abandoning plans to acquire the CRM platform. However, the share price has since bounced back, setting a 52-week high of $762.47 on December 4, helped by the company beating Q3 estimates. 

HubSpot Beats Salesforce on Q3 Revenue Growth 

Revenue for the September quarter increased 20% year-over-year to $669.72m from $557.56m in Q3 2023. Adjusted EPS was up 37% to $2.18 per share from $1.59 per share. Analysts had been expecting an EPS of $1.91 on revenue of $646.97m. 

“Q3 was another strong quarter of revenue growth, operating profit growth and customer growth … With our relentless focus on innovation with AI and solid momentum in Q3, I’m more confident than ever in HubSpot’s durable growth,” said Rangan in the earnings release. 

HubSpot forecast an EPS of $2.19 per share on revenue of $673m at the midway point, which is in line with analysts’ consensus, according to data from Yahoo Finance. 

In comparison to HubSpot’s Q3 results, Salesforce’s Q3 sales were up 8% year-over-year. Freshworks [FRSH], which offers a CRM solution, reported a 22% jump in revenue in Q3. 

Here’s how the three stocks’ fundamentals compare. 

Source: Yahoo Finance

HUBS stock has the highest P/S ratio of the three and could be considered overvalued, especially if one considers that revenue growth is forecast to decline in the next fiscal year. 

HUBS Stock: The Investment Case

The Bull Case for HubSpot

Following the completion of the Frame AI acquisition, Truist analyst Terry Tillman reiterated a ‘buy’ rating and $750 price target on HubSpot, which implies an upside of 7.27% from the most recent closing price. 

Tillman wrote in a note that he believes “the acquisition likely represents a relatively small technology tuck-in” based on the Frame AI’s last valuation of $33m back in November 2022. He added he remains “bullish on numerous growth catalysts in 2025, including AI product monetization (likely aided by Frame AI).”

BofA analyst Brad Sills also reiterated a ‘buy’ rating in December following meetings with HubSpot’s leadership team, raising his price target from $780 to $850, an upside of 21.58%. 

“AI represents a catalyst for market consolidation and expands the [total addressable market] to the wider sales services industry,” Sills wrote in his note. 

The Bear Case for HubSpot 

The big question is whether the integration of Frame AI into Breeze is going to improve HubSpot’s offering enough to help halt its stalling customer base growth. 

The company added 11,749 customers in Q1 and the average subscription revenue per customer was $11,447. Q2’s numbers were 11,214 customers added with an average spend of $11,215 and Q3’s were 10,074 and $11,235. The average subscription revenue per user across 2023 and 2022 was $11,384 and $11,163, respectively.

While 28% of new annual recurring revenue came from larger deals in Q3, the plateauing average spend could be down to some customers being reluctant to add new products to their existing subscriptions. 

Conclusion

HubSpot is confident that 2025 will be the year it can reap the rewards of AI. However, there are question marks around customer base growth and how much each customer is willing to spend. Investors may want to keep an eye on whether AI will help the company to boost these numbers in the quarters ahead.