Sunday, 10 December 2023
by Earn Media
Stock splits make a company’s stock more accessible by reducing the share price, but they can also cue investors in to buying opportunities. Namely, the company must be doing something right if its share price increased so substantially that a stock split was necessary.
However, investors need not wait around for a split to take place. A more prudent strategy is to identify stocks that have performed well in the past and evaluate them as potential investments. For instance, shares of HubSpot (NYSE: HUBS) and Mastercard (NYSE: MA) climbed 861% and 322%, respectively, over the last seven years.
Both companies qualify as stock-split candidates after those gains, but the stocks are worth buying whether those splits happen or not. Here’s why.
HubSpot specializes in customer relationship management (CRM). Its platform comprises productivity applications for sales, marketing, and customer service, as well as solutions for content management and commerce. Those tools help clients generate leads, convert leads into customers, and build lasting customer relationships.
HubSpot started with marketing software, and it remains a leader in marketing automation. However, the company has successfully expanded into CRM by focusing on underserved small and medium-sized businesses (SMBs). Clients in that market segment find its freemium pricing, tiered product offering, and integrated suite of simple software compelling. In fact, HubSpot is the leading CRM vendor among SMBs, according to research company G2.
HubSpot reported solid financial results in the third quarter. Its customer count increased 22% to surpass 194,000, and subscription revenue per customer ticked 3% higher. In turn, revenue increased 26% to $558 million, and non-GAAP (adjusted) net income soared 138% to $83 million. Investors should expect similar momentum in the future as the company continues to gain share in CRM, a market forecast to grow at roughly 14% annually through 2030 according to Grand View Research.
HubSpot regularly brings new products and features to market, expanding its value proposition for customers. Most recently, the company added software modules for operations and commerce teams, revamped its sales module, and began rolling out artificial intelligence capabilities across the platform to automate tasks like drafting emails and marketing copy.
With that in mind, HubSpot values its addressable market at $51 billion, and Morgan Stanley analysts expect the company to grow revenue at 23% annually over the next five years. That forecast seems reasonable, given its strong presence in CRM. To that end, the current valuation of 12.2 times sales seems rather cheap, especially when the three-year average is 16.8 times sales. Investors should feel confident in buying a small position in this growth stock today.
Mastercard operates one of the largest payments networks in the world. It ranks third (behind Visa and UnionPay) in purchase transactions but first (alongside Visa) in merchant acceptance locations. The most obvious benefit of that scale is a powerful network effect, but it also affords Mastercard an important cost advantage.
Specifically, the company earns higher margins than smaller peers like American Express and PayPal because it can spread expenses over more transactions. That means Mastercard can invest more aggressively in product development and marketing, perpetuating its advantage. Suffice it to say that Mastercard benefits from a nearly insurmountable economic moat, something that Warren Buffett prizes in a business.
Mastercard reported solid financial results in the third quarter. Revenue increased 14% to $6.5 billion due to strong growth in dollar volume and processed transactions, and non-GAAP net income soared 26% to $3.39 per diluted share. Investors have good reason to expect similar momentum in the future as digital payments become increasingly prevalent.
Mastercard recently won approval to process payments in China, making it the second foreign company after American Express to gain direct access to the massive market. Visa applied for a license more than three years ago, but Chinese regulators have yet to make a decision. That could be a powerful tailwind for Mastercard in the coming years.
With that in mind, global digital payments revenue is forecast to increase at 6.2% annually through 2027, but Mastercard should grow much faster than the broader market, given its scale. Indeed, Morningstar analyst Brett Horn expects the company to grow sales at 12% annually over the next five years. That makes its current valuation of 16 times sales appear reasonable, especially when the three-year average is 18.3 times sales. Investors should feel comfortable buying a small position in this growth stock today.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Mastercard, PayPal, and Visa. The Motley Fool has positions in and recommends HubSpot, Mastercard, PayPal, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard, short December 2023 $67.50 puts on PayPal, and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.