HubSpot(NYSE: HUBS) easily beat expectations for its fourth-quarter report last week, reporting 24% year-over-year revenue growth and a 56% jump in adjusted earnings per share. While it wasn't all good news, an analyst at Morgan Stanley took the opportunity to bump up the financial services firm's price target on the stock.
Morgan Stanley maintained its "overweight" rating on HubSpot and raised its price target from $697 to $763. This new price target represents an upside of about 24%. The analyst was impressed by HubSpot's solid results and its decent guidance, although macroeconomic headwinds could negatively impact the company's performance.
Winning new customers but struggling to expand spending
HubSpot ended 2023 with 205,091 customers, up 23% from the end of 2022. This growth in new customers was the driving force behind HubSpot's estimate-busting Q4 revenue growth.
One area where HubSpot struggled was convincing existing customers to spend more. The average subscription revenue per customer grew by just 1% year over year, a sign that customers remain cautious against the backdrop of an uncertain economic environment.
HubSpot is moving to a seats-based pricing model this year, which has the potential to boost customer spending. However, the company still expects revenue growth to slow down a bit in 2024.
Is HubSpot stock a buy?
HubSpot's ability to grow its customer base is impressive, and revenue could come in higher than the company's outlook if efforts to drive higher customer spending pay off. HubSpot expects to generate adjusted EPS of around $6.90 in 2024, which puts the current price-to-earnings ratio at roughly 89. The new price target would imply a P/E of 111.
For HubSpot's valuation to make sense, the company needs to accelerate growth. HubSpot mainly serves smaller businesses, and it's only begun to scratch the surface of its market opportunity. The company pegs its total addressable market at $51 billion today.
Unlocking that market opportunity will require HubSpot to sell more to its existing customers. HubSpot's struggles to do so, along with a sky-high valuation, make the stock a somewhat risky bet.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends HubSpot. The Motley Fool has a disclosure policy.
