Bulls usually win over bears in the long-term. Can long-term value win over growth?

Guess what happens when pending mergers fall apart. Generally speaking, the stock of the company being acquired takes a steep dive. That’s the case for HubSpot, Inc. (NYSE: HUBS) as shares of the digital marketing stock fell 20% this week even when the broader markets were yet again challenging all-time highs. HubSpot has been a merger “stock rumor” with Alphabet Inc. (NASDAQ: GOOGL) since April. Even in May, CNBC confirmed that HubSpot was in merger discussions with the parent of Google. But merger hopes were squashed this last week after Bloomberg reported that the Alphabet-HubSpot merger talks are now off the table. And to add insult on top of injury, the report suggested that the review didn’t even make it deep into the due-diligence phase.

So how would a “tactical bull” view HubSpot on a standalone basis? Is it a Buy or a Sell? Can it live up to its own growth expectations? Or does it now need a larger parent that can rekindle its growth with a turbo charger of a much broader customer base?

REGULATORY HURDLES GALORE

One serious consideration in the most recent years is that the regulatory powers that be just do not want the world’s technology giants getting even larger. It may be hard to stop organic growth, but many mergers, even some smaller less newsworthy deals, have been blocked by the FTC or DOJ and others have been given extra-long reviews. European regulators also seem like they want to block most big mergers, and they act like they want to tear companies apart that are highly dominant — even if the European tech and IT sectors haven’t competed well in decades.

BILLIONS LOST IN MARKET CAP

HubSpot’s value after the fresh drop is down to a $24 billion market capitalization. This is actually lower than before the merger rumors broke earlier this year, and the new $472 share price is actually approaching the lower trading band that HubSpot’s stock was in during the fourth-quarter of 2023. That value was $33 billion back in May.

Would another acquirer think HubSpot is as valuable as it could have been to Google and YouTube? At first glance, HubSpot’s digital marketing software would be a great bolt-on for YouTube personalities and for the small and mid-sized companies who rely on Google search and the advertising properties.

MAJOR REVENUE GROWTH

The earnings headline from May indicated that HubSpot had beat its earnings expectations and revenue expectations. That same report also came with more tepid revenue guidance for the quarter ahead. Its market cap at that time was about $31 billion. The one key upside at the time is that HubSpot’s focus on small to mid-sized businesses was very early in its total addressable market opportunity with less than 10% penetration across all of its product and customer segments. The 2023 total addressable market was now viewed as being $77 billion.

HubSpot’s annual revenue rose from about $883 million in 2020 to almost $2.2 billion in 2024. Analysts are calling for $2.56 billion in revenue in 2024 and $3.03 billion in 2025.

ANALYST BRIGADE NOW LOWERING EXPECTATIONS

Many analysts on Wall Street had made calls back in April, May and June. Now the analyst brigade has responded on July 11 and July 12 with a wave of price target cuts to value HubSpot on a standalone basis rather than as a merger target.

• UBS maintained its Neutral rating but its price target was cut to $580 from $640.
• KeyBanc Capital Markets maintained its Underweight rating but its price target was cut to $460 from $520.
• Piper Sandler maintained its Overweight rating but its price target was cut to $570 from $655.
• Wells Fargo maintained its Overweight rating but its price target was cut to $650 from $750, and that was after raising its target to $750 from $725 back on June 10.

Back in May, Citigroup maintained its Buy rating but its price target was cut to $767 from $798. Also on May 9, multiple analysts lowered their price targets. Canaccord Genuity had maintained its Buy rating but the firm lowered its target to $700 from $750. TD Cowen maintained its Buy rating but its price target was cut to $680 from $700, while BMO Capital Markets maintained its Outperform rating but its price target was cut to $635 from $710. Barclays had reiterated its Equal Weight rating and the firm cut its target to $575 from $600. And Stifel had maintained its Buy rating while cutting its target to $700 from $750 at that time.

STANDALONE VALUATION

Tactical Bulls prefers to analyze companies on their own merits as a standalone operation rather than valuing them as a merger target. After the merger value has been removed, HubSpot is now valued at closer to 8-times forward revenues versus about 10-times forward revenues.  It is also valued at about 60-times earnings (per share) on a 2024/25 blended forward valuation. HubSpot also has a habit of beating earnings expectations, even though guidance in May acted as a drag. Wall Street has a very mixed view of HubSpot and was quite quick to throw in the towel for big upside price targets. This means at a minimum that the standalone value just isn’t what it could have been had the company’s products and services suddenly been available to a much larger ecosystem like Google’s full customer base.

IN THE END

HubSpot was trading at $585 just a few days earlier. And then the stock had fallen to about $532 mid-week, just before the report of the merger implosion torpedoed its share price. HubSpot closed down about 2.8% at $476.13 on Friday. Its 52-week range is $407.23 to $693.85

At this point, it seems the prudent outlook for HubSpot is to wait to see if the next earnings report from HubSpot has upside or downside. After all, so many corporate IT budgets are currently so focused on artificial intelligence that many non-A.I. service providers are having a hard time competing for attention. The current view of Tactical Bulls is that HubSpot shareholders may now have to live with more reasonable expectations than just waking up to a huge merger premium in the stock price.

CHART REVIEW

The chart below has been provided by StockCharts.com and shows the candlestick trading history over the last two years. The stock might be nearing that support from late in 2023 but severe damage has also been seen based on long-term moving average violations to the downside. While charts should always matter to many investors, a caveat for pure technical evaluation after a merger implosion — reading charts at that time can feel a bit like combining wizardry with a dash of voodoo and a sprinkle of astrology.

2-year HubSpot chart provided by StockCharts.com