Salesforce.com vs. HubSpot: Which CRM Stock is a Better Buy?

NYSE: CRM | Salesforce.com Inc News, Ratings, and Charts

CRM – Software stocks Salesforce (CRM) and HubSpot (HUBS) are being rewarded by investors given the rising demand for remote-working software solutions in the current era of hybrid work structures. A favorable industry backdrop and continued innovations should allow both stocks to keep moving higher in the coming months. But let’s find out which of these stocks is the better buy now.

Software companies made it possible for businesses to survive the COVID-19 pandemic last year by strengthening their online presence and delivering services to clients using Customer Relationship Management (CRM) based cloud computing solutions. 

While things are gradually returning to normal with mass vaccinations, many businesses are likely to maintain a hybrid working model even in the post-pandemic world given its benefits. The Software-As-a-Service (SaaS) CRM market is expected to reach $44.17 billion by 2025.

Salesforce.com Inc. (CRM) and HubSpot, Inc. (HUBS), two leading giants in this space, have been capitalizing on the industry tailwinds. Both stocks generated healthy returns over the past three years. While CRM returned 88.4% over this period, HUBS surged 364.5%. In terms of their past year’s performance, HUBS’ 267.1% makes it a clear winner versus CRM’s 48% gain. But, which of these stocks is a better pick now? Let’s find out.

Click here to check out our Software Industry Report for 2021

Latest Movements

Last month,  CRM’s integration and API platform, MuleSoft, was selected by TAB Bank, to build its open banking strategy and grow an ecosystem of partners. On March 24, CRM launched Sales Cloud 360. It will provide a complete growth platform for digital sales to companies of every size. In February, the Coca-Cola bottlers in North America partnered up with CRM to help digitally transform and streamline its field service operations, using Salesforce Consumer Goods Cloud. Also, CRM has acquired Acumen Solutions, a leading professional services firm with deep Salesforce knowledge and extensive industry expertise.

Last month, HUBS was recognized as a gold medalist and leader in the 2021 Customer Service Management Data Quadrant report from SoftwareReviews. Also in March, HUBS announced the addition of Conversation Intelligence (CI) to Sales Hub Enterprise and Service Hub Enterprise. The addition  helps to quickly capture, record, and analyze  team’s call data. And in February, HUBS acquired The Hustle, a media company that produces a newsletter, podcast, and premium research content. The acquisition is expected to improve HUBS’ valuable content across a broader range of topics and a more diverse set of media.

Recent Financial Results

CRM’s revenue for the fourth quarter, ended January 31, 2021, increased 19.9% year-over-year to $5.82 billion. Revenue from the subscription and support segment came in at $5.48 billion, up 20% year-over-year. Its gross profit increased 19.7% year-over-year to $4.34 billion. Its  non-GAAP income from operations came in at $1.01 billion, which represented a 36.6% year-over-year rise. CRM’s non-GAAP net income has increased 62% year-over-year to $975 million. Its non-GAAP EPS also increased 57.6% from the prior-year period to $1.04.

For the fourth quarter ended December 31, 2020, HUBS’ total revenue rose 35.4% year-over-year to $252.07 million, with subscription revenue rising 36.4% from the prior-year period to $244.32 million. Its gross profit increased 36.3% year-over-year to $204.77 million. HUBS’ non-GAAP operating income came in at $24.62 million in the fourth quarter, up 39.7% from the year-ago period. Its non-GAAP net income increased 12.3% year-over-year to $20.14 million. And its non-GAAP EPS increased 5.3% year-over-year to $0.40.

Past and Expected Financial Performance

CRM’s revenue and total assets grew at CAGRs of 26.3% and 44.5%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 34.6% over the past three years.

Analysts expect CRM’s revenue to increase 21.5% in the current quarter (ending April 30, 2021), 21.2% in the current year and 18.8% next year. Its EPS is expected to grow 12.9% in the current quarter, but decline 30.3% in the current year, and then rise 21% next year. CRM’s EPS is expected to grow at a rate of 12.9% per annum over the next five years.

In comparison, HUBS’ revenue and total assets grew at CAGRs of 33% and 40.5%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 60.1% over the past three years.

Analysts expect HUBS’ revenue to increase 36.7% in the quarter ending June 30, 2021, 32.3% in the current year and 26.2% next year. However, its EPS is expected to decline 3.3% in the current quarter but improve 19.7% in the current year and 43.7% next year. Furthermore,  its EPS is expected to grow at a rate of 33.7% per annum over the next five years.

Profitability

CRM’s trailing-12-month revenue is 24.1 times than  HUBS’. But HUBS is more profitable, with a gross profit margin of 81.1% versus CRM’s 74.4%.

However, CRM’s ROE of 10.8% compares favorably with HUBS’ negative value.

Valuation

In terms of forward non-GAAP P/E, HUBS is currently trading at 329.39x, 395.3% higher than CRM, which is currently trading at 66.5x. Also, in terms of forward non-GAAP PEG, HUBS’ 13.10x is 396.2% higher than CRM’s 2.64x. CRM’s forward EV/EBITDA of 27.11x is significantly lower than HUBS’ 160.10x.

Thus, CRM looks more affordable here.

POWR Ratings

While HUBS has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system, CRM has an overall B rating, which equates to a Buy.

Both CRM and HUBS have a Growth Grade of B, consistent with expected growth in their financials, and a Sentiment Grade of B, which is reflecting favorable analyst sentiments.

However, in terms of Value Grade, CRM has been graded a C, given its marginally higher valuation with respect to its peers. In comparison, HUBS’ Value Grade of D signifies its overvaluation.

Of 61 stocks in the Software – Business industry, CRM is ranked #14, while HUBS is ranked #27.

Beyond what we’ve stated above, our POWR Ratings system has also rated both CRM and HUBS for Momentum, Stability, and Quality. Get all CRM ratings here. Also, click here to see the additional POWR Ratings for HUBS.

The Winner

We believe that both CRM and HUBS are good long-term investments considering their efforts to  improve their cloud services, their market dominance and superior pace of expansion. However, CRM appears to be a better buy based on the factors discussed here.

CRM is a relatively cheaper option to bet on the immense growth potential of the cloud markets and the speed of the global digital transformation. In line with the improving market prospects, CRM is expected to keep strengthening its market position in the coming quarters.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Software – Business industry.

Click here to check out our Software Industry Report for 2021

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CRM shares rose $0.46 (+0.20%) in after-hours trading Tuesday. Year-to-date, CRM has gained 4.26%, versus a 10.79% rise in the benchmark S&P 500 index during the same period.


About the Author: Sweta Vijayan


Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...


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