There's Reason For Concern Over HubSpot, Inc.'s (NYSE:HUBS) Massive 28% Price Jump

HubSpot, Inc. (NYSE:HUBS) shares have continued their recent momentum with a 28% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 46%.

After such a large jump in price, HubSpot may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 14.1x, since almost half of all companies in the Software industry in the United States have P/S ratios under 5.1x and even P/S lower than 1.8x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for HubSpot

What Does HubSpot's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, HubSpot has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on HubSpot.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, HubSpot would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. Pleasingly, revenue has also lifted 112% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 17% per year over the next three years. That's shaping up to be materially lower than the 20% per annum growth forecast for the broader industry.

In light of this, it's alarming that HubSpot's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

The strong share price surge has lead to HubSpot's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for HubSpot, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 1 warning sign for HubSpot that you need to take into consideration.

If you're unsure about the strength of HubSpot's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.