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What happened
Actions of Hub Spot (NYSE: HUBS) were down 3% today at market close. It ends a terrible week for it and other fast growing companies that were abandoned by investors after the Federal Reserve indicated that an interest rate hike was underway. HubSpot ended the week down almost 23%.
So what
What do the Fed’s interest rate decisions have to do with HubSpot? The company has debt on its balance sheet ($ 400 million), but it comes in the form of notes convertible into shares and carrying a low fixed interest rate. In fact, the company has $ 288 million in cash and an additional $ 882 million in short-term investments, so a higher interest rate might even benefit companies like this that keep extra cash invested. in interest-bearing investment vehicles.
Image source: Getty Images.
However, a higher interest rate environment lowers the value of future cash flows, which in turn lowers the present value of a stock. And given HubSpot’s high-premium trades (20 and 162 times 12-month sales and free cash flow, respectively, even after the massive sell-off), stocks eventually had to pause. It turns out that it was the Fed that was destined to be the catalyst for this most recent slowdown.
Now what
Nonetheless, short-term stock price movements, however wild and painful at times, are not the best way to gauge a company’s future prospects. Although HubSpot has sold heavily lately, it is still a fast growing software company operating in the cloud-based software industry. And many customers still flock to its platform. Expectations for the current year imply a 46% increase in revenue year over year.
Add to the fact that HubSpot operates with a healthy free cash flow profit margin and has enough cash to support its expansion initiatives, it is still an impressive software company. If you originally invested in HubSpot for the long-term potential, there is no reason to be in doubt now due to a Federal Reserve-induced crash.
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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