With Shares Down Nearly 30%, Is Now the Time to Buy This Tech Software Stock?

Hubspot (NYSE: HUBS) shares are below $500 after falling from their 2024 high of $682, achieved in April. The stock is down 16% year to date and 30% from its 2024 high.

Big changes to valuation can be important signals for investors to take action. Either the stock is available at a newly discounted price or there's a fundamental issue that's likely to create more problems.

The latest financial results were generally positive

Hubspot's most recent quarterly financial results were impressive. The company achieved 23% revenue growth, and its adjusted earnings increased 40%. It produced roughly $100 million of free cash flow during the first quarter of 2024, up from $60 million in the first quarter of 2023. These figures all exceeded analyst expectations.

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Hubspot maintained its full-year revenue forecast and increased its profit guidance by 4% After digesting the quarterly results and the updated outlook, analysts held their revenue forecasts mostly constant while revising earnings expectations slightly higher.

HUBS Revenue Estimates for Next Fiscal Year data by YCharts.

From a fundamental perspective, the latest financial results indicated very little change. Hubspot is delivering strong financial results that are closely aligned with expectations.

Headlines drove Hubspot stock lower in July

Rumors circulated for several months that Alphabet was exploring an acquisition of Hubspot. Early-stage talks were reportedly progressing, signaling genuine interest from both parties. That news broke in the first week of April, sending the stock higher. Acquirers generally pay a premium to market valuation, so buyout rumors usually have a bullish effect.

Unfortunately, the inverse is also true. A stock can tumble if a potential acquisition is called off. That's exactly what happened to Hubspot on July 10, when reports surfaced indicating that Alphabet and Hubspot were abandoning their efforts. Discussions broke down before the companies even reached the diligence stage, suggesting that they were relatively far away from a deal.

The sell-off was significant. Hubspot shares fell nearly 20% in the days following the news. This brought the company's valuation well below the levels before the initial buyout rumors started in April.

HUBS PE Ratio (Forward) data by YCharts

Did the market overreact?

Hubspot's July tumble illustrates the volatility risk accompanying growth stocks with expensive valuations. Acquisition rumors came and went, but little changed about the company's financial prospects. The May quarterly results were generally positive and modestly better than expected. Analyst estimates for revenue and earnings over the next two years have barely changed since March. The only difference is that Alphabet won't acquire Hubspot soon.

Despite reiterating their forecasts, several research analysts adjusted their price targets substantially lower immediately following the news that the acquisition wasn't moving forward. The price-target reduction wasn't accompanied by a shift in analyst recommendations. This was purely a recognition of demand trends in capital markets.

From a fundamental perspective, there's no reason for investors to like Hubspot any less. From a valuation perspective, the stock became more attractive. The balance of risk and reward changed favorably for prospective buyers. Long-term investors now have a chance to "buy low."

Unfortunately, Hubspot is still exposed to much of the same volatility risk. The stock's forward price-to-earnings ratio (P/E) is nearly 70, even after falling. It's also expensive relative to sales and free cash flow, and its valuation assumes ongoing rapid growth. In other words, substantial success is already assumed in the price, even after the July sell-off.

Hubspot dominates the sales and marketing software industry for small- and medium-sized business customers. It has a highly reviewed product suite and high switching costs. That results in high revenue retention and an economic moat .

These form a strong foundation for sustained growth and cash-flow generation. That makes it an attractive target for growth investors, but it should only be a priority for long-term investors with a high tolerance for volatility. The stock's valuation could translate to significant short-term drawdowns, as seen in July.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Ryan Downie has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and HubSpot. The Motley Fool has a disclosure policy .