Does the HubSpot Stock Drop Reflect a Broader SaaS Share Downturn?

Credit: Hubspot.com

HubSpot suffered a financial blow when its stock price tumbled by as much as 7.4% yesterday, July 26, and was still down by 5.9% come noontime. This was a surprise considering the company recently boosted its offerings for its free-tier CMS, CRM, and marketing automation. Accompanying the stock price decrease was reduced price targets from analysts. Last Friday, Cowen analyst J. Derrick Wood cut his target from $670 to $415 followed by Barclays analyst Ryan MacWilliams lowering his projection from $375 to $325.

According to MacWilliams, HubSpot’s lukewarm performance might have less to do with the company’s first-quarter results and more with how investors view the SaaS market in general. A downturn is currently sweeping a wide array of SaaS platforms. On July 14, Morgan Stanley cut the price targets of software companies like HubSpot (from $539 to $436), Freshworks (from $23 to $17), and GoDaddy (from $95 to $91), among many others.

Overall, the financial services company slashed forecast revenue by 1%/3% facing a possible downtick in growth. It also reduced the billing estimates for this year by an average of 2%. These developments signal the SaaS market’s slowing demand amid rising inflation and a potential recession. To make matters worse, economists have yet to figure out if the United States is approaching a recession or if it’s already in one. And this will have an impact on an industry known for being resilient against these conditions, especially for a big player like HubSpot.

Now, HubSpot investors are keeping a close eye on how the company will perform when it releases its second-quarter results on August 4. They are also keen on the release of the quarterly GDP report by the US Department of Commerce. So, what can they expect?

Weathering the Inflation Storm

Despite its floundering stock prices, HubSpot has been riding a wave of growth stemming from its promising first quarter results, which is seen to continue in the second quarter. The company set revenue guidance of somewhere between $409 million and $410 million, up from $310.8 million in last year’s second quarter. If this materializes in the second quarter results, it could further demonstrate not just HubSpot’s but also the SaaS market’s resistance to inflation.

Moreover, the CRM platform anticipates adjusted earnings per share somewhere of about $0.42 to $0.44 in the second quarter, parallel to last year’s $0.43. Meanwhile, the non-GAAP operating income is expected to be around $27 million to $28 million.

Although HubSpot’s price targets have continually been slashed throughout this month, it was granted an “overweight” rating by Morgan Stanley, which means the stock price would likely increase in the future. The company was also given a 61.46% potential upside for growth.

There is a chance that the economy does not fall into recession, given the country’s strong labor market and unchanged unemployment rate amid high inflation. According to National Economic Council Director Brian Deese, the US has never faced inflation that didn’t result in the loss of jobs. As such, if the economy does not dip much further, HubSpot and the SaaS market could be poised for a rebound.

However, the country is still experiencing economic turmoil, with the inflation rate already reaching 9.1%, the highest in 40 years, accompanied by particularly large increases in the prices of energy, fuel, and food. And the limited buying power of Americans could affect HubSpot’s growth. It is safe to say that nothing is certain until the company releases its second-quarter results.