Sprout Social stock is down 77% from ATH: time to buy the dip?

Sprout Social stock price has remained under pressure this year as the company’s growth trajectory slowed. SPT was trading at $32.45, down by over 77.5% from its all-time high, bringing its valuation to about $1.86 billion. 

Good product, but sales growth is a concern

Sprout Social is a top software company used by companies like HP, Cintas, Atlassian, and Rackspace. Its service is used by over 31,000 customers globally. 

Its product lets companies post and manage their social media accounts like X, Facebook, LinkedIn, Pinterest, and TikTok. In addition to posting, the company provides these firms with analytical tools that lets them see and interpret their data. 

Sprout Social’s biggest challenge is that it operates in a highly competitive industry. Hootsuite is its biggest competitor, followed by firms like Sendible and Zoho Social. 

Its other top competition comes from social media platforms themselves since one can easily send and analyze posts without a subscription.

Sprout Social’s business has grown in the past few years, with its revenue moving from $102.7 in 2019 to over $333.6 million. Estimates are that its annual revenue will get to $405 million this year, followed by $464 million next year.

The most recent quarterly results showed that Sprout Social’s revenue rose by 20% in Q3 to $102.6 million. Analysts expect its fourth-quarter revenues to be $106.7 million, up by 14% from last year’s period. It will then make $110 million next year.

A key challenge that Sprout Social has faced is that of profitability. Its annual loss stood at over $66.4 million in 2023, up from $50.2 million in the previous year. The company’s trailing twelve-month loss was $67.1 million. 

Read more: Is it time to exit Sprout Social? KeyBanc downgrades and slashes target to $28

SPT’s valuation concerns

The biggest concern for Sprout Social is that its business will likely find it difficult to sign big customers in the future since most companies have a social media software. 

Sprout Social’s stock is also not cheap as it has a forward price-to-earnings ratio of 69.50, much higher than the sector median of 25. Its valuation metric is also much higher than that of other fast-growing companies like NVIDIA and Microsoft.

The best valuation metric to use for a software company like Sprout Social is known as the Rule of 40. This is an approach where one looks at a firm’s growth and profitability metrics. Ideally, a company is said to be fairly valued if the metric comes in at above 40.

In Sprout Social’s case, the company has a revenue growth of 26% and a forward – or estimated one of 22%. The company is not yet profitable; its net margin was minus 17%. By adding its revenue growth and margins, we can estimate that the rule of 40 metrics is just 5, meaning that the company largely focuses on growth at the expense of profitability.

Sprout Social stock price analysis

SPT stock by TradingView

The weekly chart shows that the SPT stock price has been in a strong downward trend after peaking at $145 in 2022. It has moved to $32, dropping its market cap from $8.7 billion to today’s $1.6 billion. 

Sprout Social’s stock has remained below the key support level at $38.31, its lowest level in May 2023 and May 2022. It even formed a break and retest pattern, a popular continuation sign.

Therefore, the SPT share price will likely continue falling as sellers target the next key support level at $25.30, its lowest level this year.

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