Sprout Social: Watch Out for Slowing Growth (NASDAQ:SPT)

Despite the market’s cautious optimism on the back of the AI ​​boom, investors should exercise extreme caution when it comes to high-value growth stocks. I’ve moved my portfolio more toward cash and value-oriented plays since the beginning of the year and it’s locked in. Benefit from many growth positions.

Sprout Social (NASDAQ:SPT) is one stock to watch closely. The social media management platform is up more than 50% since the beginning of November and is already up nearly 10% this year. The company’s recent Q4 results and FY24 guidance have not undermined the company’s momentum either.

I last wrote the following on Sprout Social: holding In November, the stock was still trading in the mid-$40s. Now, with the stock price rising significantly and sales expected to slow somewhat this year, I once again Downgrade this location to sell It encourages investors to secure profits.

There is no doubt that Sprout Social is a fast-growing company with its own TAM of over $120 billion. Despite its small size, the company has already achieved profitability in terms of estimated operating margin. We also like the fact that Sprout Social is platform-agnostic and designed to work with any social media platform a business chooses to advertise on.

But at the same time, we must keep in mind several risks:

• Sprout Social is built specifically for social media managers, and the current macro environment is not suitable for this niche. Companies are cutting sales and marketing budgets, both for advertising dollars and the G&A staff that supports them. Social media management, a core function of the company, will continue to see secular tailwinds, but will likely see shrinking as the company tightens its belt.
• DIY competition. Sprout Social’s tools are useful, but not groundbreaking. Managing social media posts and running analytics on campaign performance can be done using internal tools or a more general-purpose competitor like HubSpot (HUBS).
• ARR slowdown. To what degree has Sprout Social already reached saturation in some market segments? Sprout Social’s ARR additions appear to be slowing sequentially as the company scales.

But by far the biggest argument for investing in Sprout Social is its valuation. Sprout Social’s current stock price is close to $64, giving it a market capitalization of $3.59 billion. In Sprout Social’s most recent balance sheet, after clearing out $98.1 million in cash against $55 million in debt, here are the company’s results: The company is valued at $3.55 billion.

Meanwhile, for the current fiscal year FY24, Sprout Social is expected to report revenue of $425.5 million from $425.3 million, representing 27% year-over-year growth and 220 bps operating margin expansion.

On these revenue prospects, Sprout Social trades as follows: 8.4x EV/FY24 revenue. In the pandemic era, paying high single-digit earnings multiples for ~30% growth stocks was normal. However, in the era of ~5% interest rates, this multiple sticks out like a sore thumb, especially for the company. We are facing an unfavorable macro environment (sales and marketing staff are being laid off in droves).

There’s no disputing that Sprout Social has had a strong run thus far, but the stock has become a “high price for good performance” type of play, and I don’t think there’s much upside left here. Secure your profits and move on to a side hustle.

Q4 Downloads

Now, let’s take a closer look at Sprout Social’s latest quarterly results. The fourth quarter performance summary is below.

Revenue increased 34% year over year to $93.6 million, beating Wall Street expectations of $91 million (+31% y/y) by three points. While third-quarter sales accelerated 3 points compared to a 31% year-over-year increase, the company is Growth is expected to slow again to 29% in the first quarter.

Management reported a strong quarter in go-to-market execution. Comments from CEO Justyn Howard on the fourth quarter earnings call:

We enter 2024 with notable momentum and an expanding range of growth opportunities. Earlier this month, we were rated the best software product by G2 across the entire software industry, adding to our leadership in every major category in which we compete. We believe our product leadership and outstanding execution position Sprout for a groundbreaking year of defining category leadership.

During the fourth quarter, we continued to see record new business ACV, with total ACV growth of 43% year-over-year. We added a record 10,000 net new organic and 50,000 net new customers, our premium product attachment rate is now at 30%, and our premium product ARR is up more than 50% year-over-year. We added record net new ARR, record growth in deferred revenue, and increased step changes in RPO and CRPO.

New RPO, or total contract value booked, was nearly 80% higher than in any quarter in history. New CRPO bookings have nearly tripled year-over-year. “Our focused strategy is producing strong results.”

Again, Sprout Social is focused on moving the premium market to the enterprise. The company said its low-end “non-core” ARR is now less than $800,000. Conversely, single customers generating more than $50,000 in ARR grew 37% year over year. Key customers this quarter include X.com (formerly Twitter), Brown-Forman, DHL, and the U.S. Chamber of Commerce.

However, we note a sequential slowdown in ARR additions. ARR in the fourth quarter increased 30% year-over-year to $385.2 million, adding $26 million in net new ARR in the quarter. This compares to $33 million in the third quarter. The fourth quarter tends to be a big quarter for software company bookings as customers try to burn through their IT budgets for the year.

From a profitability standpoint, Sprout Social’s estimated operating margin increased slightly to 1.8% from 0.8% in the year-ago quarter.

As shown in the chart below, Sprout Social’s long-term growth plans call for achieving more than $1 billion in revenue by 2028 (requiring at least 24% CAGR growth by 2028) and a projected operating margin of more than 20% by then.

Key Takeaways

I think there are many better opportunities to invest in the software industry with over 8x forward earnings (names I’m particularly interested in right now include Okta (OKTA), Asana (ASAN), and Appian (APPN) here Sell ​​your Sprout Social and secure your profits before they are eroded.