In this article, I have evaluated prominent software stocks, Microsoft Corporation (MSFT) and HubSpot, Inc. (HUBS), to determine the better buy. After thoroughly evaluating these stocks, I think MSFT is a superior choice to HUBS for the reasons discussed in this article.
A surge in the volume of enterprise data, rising automation of business processes, and growing digitization are the major drivers of the software market. Moreover, rising network security and privacy concerns support the industry's growth.
The global software market is expected to grow at a CAGR of 11.5% until 2030.
Additionally, businesses are encouraged to use cloud-based services by government rules to reduce carbon emissions, which is anticipated to improve the segment's growth prospects. Furthermore, because cloud-based subscriptions are so reasonably priced, hybrid cloud deployment is expected to become more widespread during the projected period.
While MSFT has gained 3.4% over the past three months, HUBS has gained 4.9%. MSFT’s 37.7% return over the past nine months compares to HUBS’s 86.2% gain.
However, here are the reasons why I think MSFT might perform better in the near term:
Recent Developments
On September 5, 2023, MSFT and G42 announced a multifaceted plan to make available sovereign cloud offerings, co-innovate and deliver advanced AI capabilities, and expand the existing data center infrastructure in the UAE.
Moreover, on July 26, MSFT and PayPal Holdings, Inc. (PYPL) announced MSFT's integration of PYPL's Pay Later solution in the U.S., U.K., Australia, Germany, France, Spain, and Italy. In addition, customers in the U.S. will soon have the option to pay with Venmo in the MFST Store. Venmo is currently available in the MSFT Store on Xbox in the U.S. These new integrations offer customers more flexible ways to pay and help increase customer loyalty.
Conversely, on September 6, 2023, HUBS announced the launch of HubSpot AI, its portfolio of AI-powered features for marketing, sales, and service teams, as well as the relaunch of Sales Hub, the sales solution for modern sales teams.
Recent Financial Results
MSFT’s revenues for the fiscal fourth quarter that ended June 30, 2023, increased 8% year-over-year to $56.20 billion, and its operating income rose 18.1% year-over-year to $24.30 billion. Its net income rose 20% year-over-year to $20.10 billion. Its EPS came in at $2.69, representing a 20.6% increase year-over-year.
On the contrary, HUBS’ total revenue increased 25.5% year-over-year to $529.14 million in the fiscal second quarter that ended June 30, 2023. However, its total loss from operations increased 126.8% year-over-year to $118.50 million.
Additionally, the company’s non-GAAP net income and non-GAAP net income per share came in at $69.98 million and $1.34, respectively.
Past And Expected Financial Performance
MSFT’s revenue has increased at a CAGR of 14% over the past three years. Its revenue is expected to increase 11.3% this year and 8.8% in the first quarter ending September 2023. Its EPS is expected to be $11.01 this year, $2.64 in the current quarter ending September 2023, and $2.66 in the next quarter ending December 2023.
Conversely, Over the past three years, HUBS’ revenue grew at a 36.6% CAGR. Analysts expect HUBS’ revenue to increase 22.5% this year and 20.3% in the third quarter ending September 2023. Its EPS is expected to be $5.29 this year, $1.24 in the current quarter ending September 2023, and $1.50 in the next quarter ending December 2023.
Valuation
MSFT’s forward P/S multiple of 10.53 is lower than HUBS’ 12.67. Additionally, MSFT’s forward EV/Sales multiple of 10.39x is lower than HUBS’ 12.33x.
Thus, MSFT is more affordable.
Profitability
MSFT’s trailing-12-month CAPEX/Sales of 13.26% is higher than HUBS’ 1.71%. In addition, MSFT’s trailing-12-month levered FCF margin of 22.31% is higher than HUBS’ 18.08%.
Thus, MSFT is more profitable.
POWR Ratings
MSFT has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, HUBS has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MSFT has a B grade for Stability, which is in sync with its 60-month beta of 0.90. On the other hand, HUBS has a C grade for Stability, which is justified by its 60-month beta of 1.58.
Among the 46 stocks in the Software - Business industry, MSFT is ranked #13, while HUBS is ranked #21.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Value, Sentiment, and Quality. Get all MSFT ratings here. Click here to view HUBS ratings.
The Winner
The rapid development of technologies like blockchain, artificial intelligence, cloud computing, and machine learning is primarily driving the software market. These technologies provide new avenues for creating and using software, stimulating the development of cutting-edge solutions and applications.
Industry players such as MSFT and HUBS are well-positioned to benefit from these industry tailwinds. However, HUBS's lower profitability and elevated valuation multiples make its competitor MSFT the better buy.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Software - Business here.
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MSFT shares were trading at $332.74 per share on Tuesday morning, down $5.20 (-1.54%). Year-to-date, MSFT has gained 39.69%, versus a 17.58% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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