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Bloomberg Intelligence estimates that generative artificial intelligence (AI) software sales will increase from $5 billion in 2023 to $318 billion by 2032, compounding at roughly 59% annually. Put differently, the generative AI software market could soar 6,260% over that time.
Investors hoping to benefit from that colossal opportunity should be building a basket of AI stocks today. Here's why HubSpot (NYSE: HUBS) is a worthwhile investment.
HubSpot's CRM software is popular with small and mid-market businesses
HubSpot offers customer relationship management (CRM) software. Its platform includes productivity applications for marketing, sales, and customer service teams, as well as solutions for payments and content management. Those products help businesses engage leads, convert leads into customers, and maintain lasting relationships with those customers.
HubSpot started with marketing software in 2006 and that remains its core competency. Consultancy Gartner recently recognized HubSpot as a leader in marketing automation software, due in part to its focus on inbound marketing strategies and investments in artificial intelligence (AI). For context, inbound marketing pulls leads toward a brand with useful content like informative articles, whereas outbound marketing pushes leads toward a brand with traditional advertising.
Inbound marketing can be more cost effective because it generates fewer but higher-quality leads, simply because the content is designed to be found by customers already interested in the topic. That makes inbound marketing attractive to small and mid-market businesses (SMBs). HubSpot has further catered to that underserved market segment with simple software and freemium pricing.
The company has been quite successful with that strategy. HubSpot has not only expanded into a full CRM platform, but also earned a leadership position in sales automation software among mid-market businesses, according to analysts at Morningstar. Additionally, peer-review-based research company G2 ranked HubSpot as the best software seller in any product category in 2023 based on high customer satisfaction scores and a strong market presence in several CRM product categories.
HubSpot is using generative artificial intelligence to enhance its CRM software
Last September, HubSpot announced a set of platform-wide AI capabilities that have slowly been rolling into general availability. Features include generative AI assistants, virtual agents, and predictive AI insights, all designed to accelerate productivity across marketing, sales, and customer service teams. Examples are listed below by CRM category.
- Marketing: AI assistants can create media content and draft text across webpages, blogs, social media, and email.
- Sales: AI assistants can draft and summarize emails; predictive AI tools can forecast sales, generate deal health scores, and identify action items.
- Customer service: AI assistants can answer questions and summarize conversations; virtual agents can respond to customer support queries.
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HubSpot also introduced an AI chatbot, called ChatSpot, that can automate a variety of tasks using natural language, such as updating CRM contacts, drafting emails, and creating custom reports for sales, marketing, and customer service teams.
HubSpot has embedded AI across its four product tiers, free, starter, professional, and enterprise. The most advanced features are reserved for the professional and enterprise tiers, which could help the company upsell existing customers and attract more mid-market businesses to its CRM software.
HubSpot is a worthwhile investment right now
HubSpot reported solid financial results in the fourth quarter, beating expectations on the top and bottom lines. Revenue rose 24% to $582 million, primarily because its customer count climbed 23%, but the average subscription revenue per customer also increased 1 percentage point. Meanwhile, non-GAAP (adjusted) net income increased 53% to $98 million.
During the earnings call, CEO Yamini Rangan told analysts:
We remain focused on SMB, a very large, growing, and underserved market. And we are well positioned to innovate and be a leader in this market. The way we differentiate is by making our products easy to buy, easy to adopt, and easy to use.
Rangan also said HubSpot will continue to bring AI capabilities and more sophisticated functionality to its CRM platform to create new monetization opportunities.
Wall Street expects the company to grow sales at 17% annually over the next five years. I think that estimate leaves room for upside if HubSpot is particularly successful in driving adoption of more sophisticated AI features that come with more expensive product tiers. But the current valuation of 14.4 times sales seems reasonable even if the Wall Street consensus is correct. Now is a good time for long-term investors to buy a small position in this growth stock.
As a final thought, rumors regarding Alphabet's possible acquisition of HubSpot are swirling around the internet. While the deal is plausible, it is far from guaranteed and would probably face intense scrutiny from regulators, as explained by my colleague Danny Vena. For that reason, investors should disregard the rumors at the present time.
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