This Software Company Could Post Double-Digit Growth Next Year

HubSpot (HUBS 0.20%) develops software products for marketing, sales, and customer service. The company announced its fourth-quarter and full-year earnings results on Feb. 10, demonstrating strong growth numbers through a difficult period for tech companies.

In this video clip from "The Virtual Opportunities Show," recorded on Feb. 15, Motley Fool contributor Demitri Kalogeropoulos discusses the company's results and why he thinks it could continue growing.

Demitri Kalogeropoulos: HubSpot, this is a company I have been watching for a while and really interesting in the virtual digital space here. It's not a small company, its market cap is $26 billion. They just reported earnings a couple of days ago. I want to give you a couple of highlights of that. Really great growth in this business. It's a company that they started off with inbound marketing, helping small and medium-sized businesses kind of grow their marketing. But they have over the last few years built a really big portfolio. They have a fairly complete suite of services that they're marketing to this growing group with. Growth was up 47%, sales were up 47% in Q4 that they just announced last Friday. That's the same rate going for the entire 2021 year. A lot of these companies, we're seeing growth slow a bit in late 2021, but that's not the case for HubSpot.

We saw a good boost in their operating margins. They are still losing money, but very close to that break-even mark, operating loss was at 2.2% of sales from 3% a year ago in there. International growth is a really big story for them. International sales are going up somewhere in the 50% range. They've got a really big growing opportunity there to get a lot of more clients over the next few years. What I like about some of the story here is that their profitability this past year on an adjusted basis was 9%. The company has long-term goal of getting that up to between 20 and 25%.

This is a slide from their presentation, the earnings presentation this week just showing what kind of power the business could have under different growth scenarios. You see the middle here, normal growth, normal growth for this company, they are saying around 30%. Like I said, they just finished a year of 47% growth. Anything below 30 they are thinking they can maybe focus on increasing their profitability a little bit more to 3 or 4 percentage points a year in that operating margin to get that up to 10% or maybe 20% over time. The high-growth-rate scenario is over 30%.

What's great about the stock, I guess is they are definitely still on the high-growth scenario for HubSpot. They're expecting to grow sales at about 32% their projection for the year 2022 is still in the high-growth phase. It's not a cheap stock. You can see from this chart is definitely the price has come down a lot in the past, since late 2021, along with a lot of the growth stocks that we've been looking at. But it's still not really cheap. Because around that, say they are targeting close to $2 billion dollars in sales in about a year. Then market cap's over $25 billion. We're talking price-to-sales ratio more than 10 times sales, maybe in that 15 range. But if you're into growth and you like companies like this, they've got really great positive cash flow, earnings are looking good, profits are looking good, the customer engagement is great. They've got really good fan-base that's really excited about their services and they can market this growing portfolio of services to this growing group of customers. I think they have a good chance of having a nice couple of years for growth as that operating margin goes across into the positive territory, which will be a nice inflection in 2022 and then marches up to maybe 10. Hopefully, if management gets what they want toward that 20% range. It's all going to depend on how well their next few releases do and how well they do at pleasing their customers, which they've done a great job over the last three years. Definitely through the pandemic. Definitely one to watch.