BENJ GALLANDER, BEN STADELMANN, and PHILIP MACKELLAR
Both of us enjoy rolling along the road – albeit often that is more start and stop now - and listening to our audiobooks. It is a delightful way to go from point A to B. And we can do it and the police won’t accuse us of “distracted driving.”
Benj recently listened to Disrupted: My Misadventure in the Start-Up Bubble by Dan Lyons. The book, written by this veteran of Forbes and Newsweek who also pseudonymously penned the blog The Secret Diary of Steve Jobs, is a fabulous look into the behind-the-scenes world of high-tech startups. It also offers the insight of a man in his fifties, working in a youth-obsessed world of people in their twenties and thirties. It is scrutiny from the dinosaur with experience.
The book focuses on Mr. Lyons taking a job at Cambridge, Mass.-based HubSpot Inc. (HUBS-NYSE), whose raison d’être is cloud-based marketing via “inbound.” The corporate website defines inbound as “focused on attracting customers through relevant and helpful content and adding value at every stage in your customer’s buying journey.” Not exactly a trip to Tahiti but an expedition nonetheless.
With the demise of his previous employment, another victim of “old media” shrinkage, Mr. Lyons was ready to tackle this new world. But he was not happy for much of his time at HubSpot; in fact, he pans the company and many of the people who worked there. Still, he tried hard to muddle through, given that he had a wife and two children to support. He also had acute difficulty comprehending how the company could ultimately be successful.
Yet, an analysis of the corporation, by some metrics, could lead one to conclude that it has been a phenomenal triumph. Revenues that were zilch in 2009 grew swiftly, doubling last year to US$376-million. The initial public offering was in 2014 at US$25. In March, the stock price reached a peak north of US$124, since dwindling slightly to around US$120. Employees seem to be having a blast at this cool, youthful organization where games at work are de rigueur. The front page of the website recently showed three cool looking people: one with his tongue out and another in what appears to be a banana costume. Take that, IBM.
Problems do appear to be lurking. Even while its revenue skyrockets, the bottom line remains ugly with losses exceeding US$40-million over each of the past four years. The stock’s book value is under US$6. Insiders, who in the tradition of this sector were well rewarded with options, have been selling faster than fibre internet at its best. The balance sheet that was pristine through 2016 is now riddled with debt. And though it appears that many employees have indeed drunk the Kool-Aid, turnover appears high. Ironically, when employees disappear, it is often called “graduation.” Not even George Orwell could have coined that one with a straight face.
HubSpot states, “An idea in the moment has sparked a global movement. And we’re just getting started.” Has it? Until Benj started talking about the book, none of us at Contra had heard of the company. And yes, we know a lot of enterprises.
So, how about HubSpot as an investment? From the perspective of the mantra, “Price is what you pay. Value is what you get,” it becomes difficult to see the stock market worth of HUBS, with its capitalization slightly north of US$4.6-billion. However, in the funny world of high tech, strange things do happen. Heck, people who have stronger stomachs than us and are into momentum investing might find this to be a worthwhile foray for some dollars, but we would be loath to buy this company. If anything, it appears like an excellent short, but that also is too dangerous for our alimentary canals. Perhaps it would be a suitable holding for good-looking twentysomethings, but it does not suit us grizzled veterans.