Sprout Social (SPT)

I’ve been reading this board and posting occasionally for several months now and my portfolio is so much better for it. Huge thanks to Saul and all the other brilliant minds here.

I want to present a company for the board to consider and would love more analytical eyes hunting for issues that I have missed. I’m pretty good at identifying trends and opportunities, but I don’t always see the signs in the numbers that so many of you excel at.

The company is Sprout Social (SPT), a SaaS platform to help businesses manage and optimize their social media presence. Their overview says:

Sprout empowers businesses around the globe to tap into the power and opportunity of social media. Our cloud software brings together social content and messaging, data and workflows in a unified system of record, intelligence and action. Operating across major social media channels like Twitter, Facebook, Instagram, Pinterest, LinkedIn, Google and YouTube, we provide organizations with a centralized platform to effectively manage social media efforts across stakeholders and business functions.

The company is headquartered in Chicago, was founded in 2010, and went public in December, 2019. They now also have offices in Seattle and Dublin, Ireland. Their investor relations page gives them a 5.1B market cap (my TDAmeritrade account says it’s 7.1B). Q2 earnings at the start of August showed YoY revenue growth of 42% ($44.7 million in Q2 2021 vs $31.4 million in Q2 2020), 75% gross margins (up 1% from last year), and 99% of revenue via subscriptions. So they seem to fit the overall financial goals of this board.

As of June 30, 2021 they had 29,612 customers in over 100 countries up from 24,356 customers in the same period in 2020. Of those customers 3,936 spend over $10k in ARR, up from 2,544 in 2020. Their Q2 report was a beat and raise. Here’s the 10-Q: https://d18rn0p25nwr6d.cloudfront.net/CIK-0001517375/f042e17…

They are currently integrated with all the major players in the social media space and then some.

Based on the spend of their $10k+ customers, they see their expanded TAM as $50B with a current penetration of 3-5% for Sprout and all their competitors combined. That is from their investor presentation, which is here: https://s27.q4cdn.com/278669463/files/doc_presentations/2021….

Of course they also see the TAM as quite likely to expand, as their earnings call indicates that they are quickly jumping into the social commerce space as more businesses begin that integration. Here is the earnings call transcript as provided by TMF: https://www.fool.com/premium/coverage/earnings/call-transcri….

Specifically to that point in the Q&A, JH answers this way:

But part of our thesis here was to the last point that you made, which is we want to make sure that for businesses that are either doing all or a significant part of their sales through e-commerce and now social commerce specifically, then it’s an obvious choice that we can go out to market to any brand that is using the platforms that we’re integrated with and be a very obvious solution for them to be able to make all of this strategy work together cohesively. And so we definitely see this as an opportunity to expand our game overall, but more specifically, just take that to market and make some significant progress in the installed base of our partners.

Founder/CEO Justyn Howard has a 96% Glassdoor rating based on 279 reviews and 96% would recommend working there to a friend. https://www.glassdoor.com/Overview/Working-at-Sprout-Social-…. Two other founders, Aaron Rankin and Gil Lara are still with the company and sitting in the C-Suite as CTO and CCO, respectively. The company has a number of awards for culture and leadership.

This is an interview with Justyn Howard on how he got started: https://www.youtube.com/watch?v=jJO8YN2rnNs. That’s from 6 years ago. This next link is a bit more recent (3 years). It’s shorter and has a less-annoying interviewer, but doesn’t delve into the founding as much: https://www.youtube.com/watch?v=q3kbBvAojvU. Both were before the company went public.

A question I had came from the investor relations deck above, which shows a dip in their quarterly organic revenue numbers from a high in 2018, decreasing in 2019 and 2020, and then going back up to 2021, but still not quite where it was in 2018. The percentages they show are:
2018: 54%
2019: 44%
2020: 36%
2021: 42%

My guess is that the dip was related to expenses for their late 2019 IPO, maybe in conjunction with Covid and/or opening new office locations, but I can’t tell. They might have had 42% growth because of easy comps in 2020.

Their gross margin climbs across all those years and they became FCF positive for the first time in this quarter.

They have been growing their $$ spend on R&D and S&M while also decreasing the percentage of revenue spent in those areas.

The Sprout Social job board is looking for International Marketing Managers in Sydney, Australia and in Singapore. There’s a position for a Customer Success Manager, Retention, in the Philippines, a Business Development Rep. in Toronto, and most positions in their US offices include “Select US cities.” in addition to their Chicago and Seattle offices. Several are building out their Dublin office and they are looking for fluency in both Spanish and Portuguese for LATAM accounts. It looks like aggressive expansion across the board to me. Here’s the board: https://sproutsocial.com/careers/open-positions/#/.

That’s what I’ve got. I know just from running small non-profits that even managing social media across 2-3 platforms is a huge time sink, while also being absolutely necessary, even with a small organization. For larger companies it is essential, much more complex, and fraught with Twitter-trending peril. And social commerce is roaring down the tracks, powered by the Gen Z engine. The platform service Sprout Social offers seems like a must-have to me.

I think the opportunity for Sprout is massive and they have a solid team that appears to be executing well. I opened a starter position this morning and would love additional sets of eyes on the company.



To: JabbokRiver42

Re: Sprout Social (SPT) Price: $130.67 Market Cap: $7.1 billion

I enjoyed reading your write-up of Sprout.

The stock price of Sprout has performed extremely well since Bert recommended it at $27.11 in July 2020.

Although I have been a happy shareholder since then, I chose not to recommend Sprout to this board because quarterly revenue has been growing at less than 40% until the most recent quarter and the gross margin is less than 80%. I agree with the Seeking Alpha articles that indicate most of Sprout’s share price appreciation has come multiple expansion.

Revenue growth shows an accelerating trend but barely meets the 40% growth threshold of this board:

Sep 2020 +27%

Dec 2020 +33%

Mar 2021 +34%

Jun 2021 +42%

Usually, this board like to see a gross margin of at least 80%. Sprout’s gross margin is 75%.

When Bert first recommended Sprout, it was selling for 8x sales, now it’s selling for over 40x sales (TTM).

With the run in Sprout’s stock price, I have reduced Sprout from a major holding (12%-15% of my portfolio) to a minor holding (4%). As you point out, there is still a lot to like about this company. I hope to buy more at a lower valuation.



A bit of extra news from Sprout Social posted today:

Lede: CHICAGO, Sept. 22, 2021 (GLOBE NEWSWIRE) – Today, Sprout Social, Inc. (“Sprout Social”, the “Company”) (Nasdaq: SPT), an industry-leading provider of cloud-based social media management software, announced it has surpassed $200 million in annual recurring revenue (ARR). Additionally, Sprout now serves more than 30,000 customers across the globe, underscoring both its market expansion and accelerated growth rate.

Full release: https://investors.sproutsocial.com/news/news-details/2021/Sp…