Sprout Social, Inc. (SPT) is an online social media management tools operator that offers cloud software, contact management, and communication tools to businesses worldwide. The Chicago-based concern’s ability to secure a record number of net-new customers and expand integrations with social commerce leaders have helped SPT’s stock gain 29.6% over the past three months.

But the stock closed yesterday’s trading session at $82.60, 13.7% below its 52-week high of $95.75.

Although increasing social media usage and the company’s aggressive investments have driven its total ARR up 38% year-over-year to $172.0 million in its last reported quarter, SPT’s  losses have expanded significantly. So, until the company shows a path to profitability in an increasingly competitive landscape, we think it could be a risky bet.

Click here to check out our Software Industry Report for 2021

Here is what we think could influence SPT’s performance in the upcoming months:

Competition in the Digital Marketing Industry

As digital ad spending by social media giants continues to rise, the digital marketing landscape has turned even more competitive. With numerous brands recruiting social media management tools amid an accelerated shift toward online strategies, dominant players in the industry have begun  adopting sophisticated tools to attract more customers and remain competitive. With big names like HubSpot Inc. (HUBS) and Sprinklr, Inc. (CXM) investing heavily to develop innovative AI-driven solutions to satisfy the diverse needs of social commerce leaders and capture  significant  market share, generating profits will not be easy for SPT in the near term. 

Uncertain Financial Outlook

SPT’s management expects total revenue to be between $43.0 million – $43.1 million, representing 37% overall growth  for the second quarter of 2021. But its non-GAAP operating loss is expected to be between $5.4 million – $5 million, significantly higher than its  operating loss reported in the first quarter of 2021. Also, its loss per share is expected to be between $0.10 – $0.09.

For its  full year 2021, SPT expects its total revenue to be in the range of $176 million – $177 million. However, the company’s non-GAAP operating loss is expected to fall between $18.5 million – $18.0 million. This uncertain outlook could  negatively impact its  share-price performance in the near term.

Bleak Financials

Although SPT’s total revenue for the first quarter, ended March 31, 2021, increased 34% year-over-year to $40.8 million, its non-GAAP operating loss stood at $2.3 million. The company’s total operating expenses rose 11.3% from its  year-ago value to $37.04 million. Its interest income came in at $52,000, representing an 88.7% year-over-year decline. Also, SPT’s non-GAAP net loss amounted to $2.5 million, while it reported a $0.05 loss per share during this period. Furthermore, the company’s cash and cash equivalents declined 25.5% year-over-year to $102.30 million.

SPT’s  10.6% trailing-12-month levered free cash flow margin is 16.1% lower than the 12.6% industry average. Furthermore,  its trailing-12-month ROE, ROA and EBITDA margins are negative 19.8%, 11.4% and 16.2%, respectively. And its  trailing-12-month net income margin came in at negative 19.2%.

Premium Valuation

In terms of forward EV/Sales, SPT is currently trading at 25.78x, which is 517% higher than the 4.18x industry average. The stock’s 30.65x trailing-12-month Price/Sales ratio is 599% higher than the 4.38x industry average. And its  34.61 forward Price/Book multiple compares with the industry average of 5.91.

Unfavorable POWR Ratings

SPT has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. SPT has a C grade for Quality. The stock’s lower-than-industry levered free cash flow margin is reflected in this grade.

Also, it has a D grade for Value, which is consistent with the company’s higher-than-industry valuation multiples.

In terms of Growth, SPT has a C grade. This is in sync with its weak financials and reflects the company’s weak growth prospects.

In addition to the grades we’ve highlighted, one can check out additional SPT ratings for Sentiment, Stability, and Momentum here.

SPT is ranked #89 of 132 stocks in the D-rated Software – Application industry.

There are several top-rated stocks in the same industry. Click here to view them.

Bottom Line

Even though SPT’s growing subscription base and recurring revenues driven by increased adoption of its platform have attracted investors, the company’s weak cash balance in a competitive market could negatively affect its profitability  further.  Moreover, analysts expect SPT’s EPS to decline 11.1% in the next quarter, ending September 2021. This, along with its stretched valuation, makes it a risky investment. Therefore, we think it’s wise to avoid the stock now.

Click here to check out our Software Industry Report for 2021

SPT shares were trading at $83.24 per share on Friday morning, up $0.64 (+0.77%). Year-to-date, SPT has gained 83.31%, versus a 17.23% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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