SPT - Sizing Up Sprout Social

Summary

• Today, we put Sprout Social in the spotlight for the first time.
• The stock has lost more than 50% of its value over the past year as the fizz has gone out of growth stocks.
• However, insiders are not buying shares in SPT; they are still selling on a frequent basis.
• With current 35% sales growth, are we getting close to a buyable moment in Sprout Social? An investment analysis follows below.

The speed of your success is limited only by your dedication and what you're willing to sacrifice "? Nathan W. Morris

We take our first look at Sprout Social ( SPT ). The stock of this web-based social media management platform concern has been more than cut in half over the prior 12 months. Sprout Social is hardly unique. Rising interest rates have decimated so much of the growth sector in 2022. Has the stock pulled back enough to start to accumulate a stake in this name delivering better than 30% sales growth? An analysis follows below.

Company Overview

Sprout Social is based out of Chicago. The company develops and provides cloud software that brings together social messaging, data, and workflows in a unified system of record, intelligence, and action.

In addition, Sprout Social offers various integrated tools in a range of functions comprising social engagement/response, publishing, reporting and analytics, social listening and business intelligence, reputation management, employee advocacy, and automation and workflows as well as professional services, which primarily consist of consulting and training services.

Almost all of the company's revenues comes from subscription fees. The stock trades around $58.00 a share and sports a market capitalization of approximately $3.2 billion.

Second Quarter Results

The company posted second quarter numbers on August 2nd. Sprout Social had a non-GAAP net loss of four cents a share. Revenues rose more than 37% on a year-over-year basis to $61.4 million. Both top and bottom line results slightly exceeded the consensus.

The company's customer base grew 14% from 2Q2021 to 33,260. More importantly, customers spending more than $10,000 annually rose 47% to 5800 and those spending $50,000 increased by 88% to 855.

For the year, management forecasts sales of approximately $254 million with a non-GAAP net loss of 10 to 11 cents a share. This would represent 35% sales growth over FY2021 when the company lost 13 cents a share on a non-GAAP basis. Sprout's GAAP net loss for 2Q2022 was 27 cents a share.

Analyst Commentary & Balance Sheet

Nearly 10% of the outstanding float in the shares is currently held short. Insiders continue to be frequent and consistent sellers of the stock despite the pull back in the equity since late last year. Numerous insiders have sold approximately $2 million worth of shares so far in October in aggregate. This follows just over $10 million worth of total sales in third quarter by insiders. The last insider purchase I can find in these shares was back in June of 2020.

The company ended the second quarter with just over $180 million in cash and marketable securities after posting a GAAP net loss of $14.6 million for the quarter. Its non-GAAP loss for the quarter was $1.9 million. In comparison, the company had a GAAP net loss of $5.3 million in 2Q2021 and was slightly profitable on a non-GAAP basis.

Verdict

The current analyst firm consensus has Sprout Social losing approximately a dime a share in FY2022 as revenues rise some 35% to nearly $255 million. The company is expected to get close to breakeven status in FY2023 as sales increase just over 30% during the fiscal year.

The stock certainly has a lesser valuation than it did a year ago, when the shares traded for more than twice current levels. However, SPT is hardly cheap at 12 times forward sales. This is especially true given the company will not be profitable until FY2024 at the earliest.

Given 30% plus revenue growth, an investor might be able to justify a small investment in Sprout if interest rates were where they were at a year ago and the Federal Reserve was still providing an accommodative monetary stance. Unfortunately, interest rates have more than doubled in the past 12 months. The yield on the 10-Year Treasury is currently north of 4.1%. That yield is likely to go higher as the central bank hikes Federal Fund rates up another 100 to 150 bps by yearend.

That is likely to continue to provide a considerable headwind in the markets for unprofitable growth names like Sprout Social. A likely recession in 2023 will also impact the company's clients in a negative way and could make current growth projections hard to meet in the year ahead. Given that, it doesn't seem to be the right time to invest in SPT even with the shares down by more than half over the past year.

The quickest way to double your money is to fold it in half and put it in your back pocket ."? Will Rogers

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