HubSpot To Dominate SMB CRM Space With AI-Driven Platform, Says BofA Analyst

BofA Securities analyst Brad Sills maintained HubSpot Inc HUBS with a Buy and raised the price target from $780 to $850.

Sills hosted CEO Yamini Rangan in investor meetings in Boston on December 12. The analyst remains bullish on HubSpot’s durability of growth. With its leading cloud platform, HubSpot addresses the vast SMB segment of the $125 billion CRM industry (Gartner).

AI catalyzes market consolidation and expands the TAM to the broader sales services industry. The use cases for HubSpot in the front office offer meaningful value arising from sales productivity gains and revenue uplift. The macro remains essentially unchanged, though there are signs of some improvement.

The rating reflects added confidence that growth will reaccelerate (to the mid-20s in an upside case) from both AI and a better macro as the company moves through fiscal 2025.

HubSpot remains focused on consolidating the SMB portion of the CRM industry (SMB ~55% of total software spending) with a unified platform built for speed and ease of use.

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Key differentiators are application integration on an organically built platform and channel reach through 6,500 ad agency reseller partners.

HubSpot builds most of its applications on the platform with a common ecosystem, embedded AI, and unified data, per the analyst. This unified platform enables HubSpot to push new agents, copilots, and features to multiple hubs instantly.

When HubSpot makes tuck-in acquisitions, underlying code is rewritten completely on the HubSpot platform to maintain platform discipline.

The HubSpot platform is built for AI-enabled features such as agents and copilots, given one unified dataset, designed for workflow that is simple for SMBs.

HubSpot maintains an agnostic approach to LLMs backing the Breeze AI platform. While OpenAI is the primary model provider, Claude and Gemini are also gaining traction.

If a customer prefers another, HubSpot can accommodate. The company has 90 embedded AI features that are populated into each of the applicable hubs.

Four agents are in beta today: customer (for support), content, social, and prospecting. Customer and support have seen the most traction today.

There are hundreds of customers in beta, to reach thousands. Early adopters of customer agent benefit from 20% to 60% case deflection.

All four agents will likely be generally available in 2025. HubSpot remains in proliferation first, monetize later mode today.

Over time, AI features (copilots, agents, and features) should provide tailwinds across all key growth metrics, such as gross retention, net retention, net adds, and eventually direct monetization via separate offerings.

Today, the focus is on driving value for small businesses via return on investment (ROI) metrics, and these tailwinds should follow.

HubSpot generates extensive unstructured data, such as emails, calls, and PDFs. The Frame AI acquisition provides stream processing to access unstructured data within HubSpot for sentiment and intent analysis.

The combination of structured CRM data and unstructured data represents a comprehensive data set and a meaningful advantage in the AI cycle.

Consistent with comments on the third-quarter earnings call, HubSpot is seeing some improvement in the macro environment, though customers are not yet back in growth mode.

Downgrades have stabilized recently, and the pressure on seat upgrades is improving. However, other upgrades remain softer (cross-sell, contacts, and non-seat-based upgrades) and are still weighing on ASP (-2% Y/Y in the third quarter) and net revenue retention (102%, versus 108%-110% in fiscal 2021 and 2022).

In recent years, HubSpot has invested in partner and sales enablement, which should provide an added tailwind to growth when customers return to growth mode (via sales productivity).

Pricing changes were made in March to enable a lower entry point and drive better, more consistent upgrade momentum.

As part of the pricing change, customers can start with one seat instead of a 5-seat minimum (Pro) and 10-seat minimum (enterprise) for Sales Hub and Service Hub.

HubSpot is already seeing healthy customer upgrade activity on the new pricing, given a lower entry point and upgrade cost on a single seat.

Upgrades will likely increase more meaningfully under the new plan in a better spending environment over a multi-year period.

HubSpot began converting customers to the new pricing during renewals in the summer. Upon the next renewal, HubSpot will convert free administrative users to paid core seats, amounting to a maximum 5% price increase, which should start in the second half of fiscal 2025.

The price target reflects an EV/revenue multiple of 12 times Sills’ calendar 2026 revenue estimate or an EV/revenue/growth multiple of 0.5 times based on his calendar 2026 revenue growth rate of +22%, in line with the large-cap software group.

Sills projected fiscal 2024 revenue of $2.6 billion and EPS of $8.00.

Price Action: HUBS stock is up 2.56% at $740.31 at last check Monday.

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