SPT - Sprout Social: Taking Advantage Of Some Tactical Miscues!

2024-05-21 09:23:36 ET

Summary

• Sprout Social shares fell sharply in the wake of a quarter in which bookings fell short of forecast which in turn caused the company to reduce revenue guidance.
• The company made some unforced tactical sales execution errors, but they are not existential mistakes and have not derailed the company's long-term growth story.
• A news story indicates that the founders of the company, are in negotiations with P/E entities to structure a bid to take the company private.
• The company continued to gain marquee customers such as P&G, Universal Pictures and American Honda, despite the bookings miss.
• The company actually raised margin and EPS guidance notably, in part due to an accounting change, but also because of more intense cost management.

Evaluating a very messy quarter and messier guidance

I have owned Sprout ( SPT ) Social shares for some time now. And I have written a couple of articles about Sprout for SA, the most recent in Oct. 2023. The shares fell sharply a couple of weeks ago, and are 40% below the price at which I last recommended them. A rather substantial miscue!

The culprit: poor guidance that drove the shares down by over 40% just on Friday, May 3. Was the share price implosion “justified?” Or has the share price implosion created a significant opportunity for patient investors in high growth IT shares. Of course, my opinion is that this is a significant opportunity for investors to enter the category leader in social media management at what I believe to be a bargain valuation. I am recommending that investors take advantage of this opportunity to initiate or add to positions in Sprout Social at this time and at this price.

On Monday, May 20th, news stories appeared that Sprout's founders, including the current CEO, Justyn Howard, had approached private equity entities looking to arrange a partnership to acquire Sprout and take it private. The board has hired Morgan Stanley to evaluate any offers that may be received. In the wake of the stories, the shares finished up Monday, rising 6%....

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