HubSpot (NYSE: HUBS) And Sales team (NYSE: CRM) resemble the David and Goliath, respectively, of the cloud-based customer relationship management (CRM) market.
HubSpot offers a free CRM platform for smaller businesses, which serves as a starting point for its paid marketing, lead generation, search engine optimization, and analytics tools. It creates ‘inbound’ marketing campaigns (such as social media campaigns, viral videos or blogs) to encourage consumers to search for brands on their own.
Salesforce owns the world’s largest cloud-based CRM platform and primarily serves larger enterprise customers. It also offers other sales, marketing, analytics and data visualization services. Like HubSpot, Salesforce is prioritizing the development of lower-cost inbound marketing campaigns to reach a broader range of consumers.
HubSpot and Salesforce aren’t direct competitors, and both stocks have posted impressive gains year to date. HubSpot’s shares are up 66%, while Salesforce’s are up 57%. Should you invest in one of these high-flying CRM stocks today?
How fast is HubSpot growing?
HubSpot’s revenue grew 33% in 2022 and expects growth of 22% to 23% in 2023. Growth cooled last year as macroeconomic headwinds prompted companies to rein in spending.
The company continued to grow its customer base at a healthy pace of 20% on average annually over the past five quarters, but struggled to grow average revenue per customer at the same pace. As a result, net revenue retention (NRR) – the percentage of recurring revenue retained from existing customers – fell below the target level of 110% over the past four quarters.
However, management believes it can keep the NRR above 100% as smaller companies continue to scale their operations in this tough market. It also expects its new AI tools to generate digital content, summarize calls and emails, help customers with chatbots and accelerate data analysis to win more customers.
As HubSpot’s revenue growth slowed, it laid off 7% of its workforce earlier this year and implemented other cost-cutting measures to boost margins. Therefore, the company expects adjusted operating margin to increase from 9.8% in 2022 to a midpoint of 13.9% in 2023, and full year adjusted earnings per share (EPS) to increase by 88% to 90% to rise.
Those growth numbers are impressive, but there is already a lot of optimism in the shares, at 75 times future earnings and 11 times this year’s sales. These high valuations, along with the lack of earnings under generally accepted accounting principles (GAAP), could limit its appeal as long as interest rates remain high.
How fast is Salesforce growing?
Salesforce’s revenue grew 18% in fiscal 2023 (which ended in January), but expects only 11% growth in fiscal 2024. Like HubSpot, Salesforce is struggling with slower software spending in this challenging economy. It has also completed a number of major acquisitions and stopped making massive purchases in the past year.
Salesforce doesn’t disclose the NRR of its cloud platforms, but its residual performance obligations (RPO) – the remaining value of its contracts that have yet to be booked as revenue – rose 12% year over year in the latest quarter. Near-term revenue growth should follow a similar trajectory.
Salesforce attracted a lot of attention from activist investors when its growth slowed. In response, it laid off about 10% of its workforce and reined in spending. As a result, the company expects adjusted operating margin to increase from 22.5% in fiscal 2023 to 30% in fiscal 2024, and adjusted earnings per share to increase 53% to 54%. That’s an impressive growth rate for a stock that trades at 27 times expected earnings and 6 times this year’s sales. It is also consistently profitable on a GAAP basis.
The company also launched its first buyback plan last year, buying back $4.1 billion of shares during the first half of fiscal 2024. All these improvements caused its activist investors to pull out, but Salesforce still has a lot of competition in the enterprise CRM market. Curbing spending at the wrong time could reduce competitiveness.
The winner: Salesforce
Salesforce is growing slower than HubSpot, but its higher operating margins, stable GAAP earnings, and lower valuation all make it a better buy. HubSpot is still a great growth stock, but its frothy valuations should limit near-term gains.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends HubSpot and Salesforce. The Motley Fool has a disclosure policy.
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