SharpSpring Stock Has Fallen 8% in Last One Year, Underperforms Market

If you are looking for the best ideas for your portfolio you may want to consider some of Greenhaven Road Capital‘s top stock picks. Greenhaven Road Capital, an investment management firm, is bullish on SharpSpring Inc. (NASDAQ:SHSP) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on SharpSpring Inc. (NASDAQ:SHSP) stock. SharpSpring Inc. (NASDAQ:SHSP) is a software company.

On August 1, 2019, Greenhaven Road Capital had released its Q2 2019 investor letter. SharpSpring Inc. (NASDAQ:SHSP) was one of the Top 5 holdings of Greenhaven in Q2 2019. The stock has posted a return of -8.2% in the trailing one year period, underperforming the S&P 500 Index which returned 20.0% in the same period. This suggests that the investment firm was wrong in its decision. On a year-to-date basis, SharpSpring Inc. (NASDAQ:SHSP) stock has fallen by 11.1%.

Last month, we published an article revealing Greenhaven’s bullish investment thesis on SharpSpring Inc. (NASDAQ:SHSP) stock in its Q2 2020 investor letter. This suggests that the investment firm has been bullish for a long time on SharpSpring.

Greenhaven’s fund posted a return of -4.0% in the second quarter of 2019, underperforming the S&P 500 Index which returned 4.3% in the same quarter. Let’s take a look at comments made by Greenhaven Road Capital about SharpSpring Inc. (NASDAQ:SHSP) in the Q2 2019 investor letter.

“SharpSpring (SHSP) is a top five position for the fund, and like any of my three daughters on a given day, it is straddling the fine line between glorious and headache. This past quarter, we significantly increased our holding as a large shareholder exited their position. More on that later.

This summer, shares of SharpSpring have declined substantially from their peak. While our initial purchases are still up 2X, they were up more than 4X at one point. The decline in share price was likely caused by a number of factors, including concerns about a slowing growth rate (24% year over year) and the company’s decision to convert debt to equity. If the product continues to evolve and SharpSpring can maintain a lifetime value/customer acquisition cost above 5, this sell off will likely be a blip on the way to a bright future. A recent sell side research initiation report had SharpSpring trading at less than 4X forward revenue while their peer group was trading above 12X. There are some rational concerns in the marketplace that help account for some or all of that discount, but I believe there is also the opportunity for significant revenue growth, margin expansion, and multiple expansion given the product quality and end market growth.

SharpSpring has two significant negatives in my opinion. The first is that the company remains dependent on the capital markets to grow at high rates. In Q1, company revenues grew by 24%, cash flow from operations consumed $2.4M, and the company had a cash balance of $17.7M. Simple math says that they will either have to raise more capital or reduce their future investments in product and sales & marketing. This is not unique for a growth company, but choices will need to be made on investments in growth and the capital to fund them.

The second issue is low insider ownership. Their core SharpSpring product is the result of an acquisition. CEO Rick Carlson, who founded the acquired company, currently owns about $5M worth of stock and has options for a similar amount. He definitely cares about the common shares and has been shareholder-friendly. The newly-hired CFO owns 100,000 options that are out of the money. SharpSpring’s Board consists of the CEO and four other members who were all brought on board for distinct and valid reasons. However, three members own very little stock, and the fourth – who was a large shareholder through convertible debt – will presumably exit the Board soon as he has sold the investment for a substantial profit.

One of my worst investments has been in Ashford Inc. (AINC), where I gravely miscalculated the damage that could be done to the common shareholders when not well represented on the board. To be clear, SharpSpring is not Ashford, but once bitten, twice shy, I reached out to the largest shareholder in SharpSpring to point out that should the remaining stock-owning Board member exit, common shareholders would not be well represented going forward. I suggested that one of “their people” go onto the SharpSpring board to represent their fellow shareholders. Unfortunately, despite this investor being the largest SHSP shareholder, the stock is a sub-2% position for their fund. A call to another large shareholder elicited a similar polite decline. Running out of top professional shareholders, we effectively have three choices. The first is to just trust the current board. The second is to sell our shares. The third is to try to proactively address the situation by offering to fill the soon to be vacated board seat.

I am very protective of my time. Many of the investors I most respect pride themselves on open schedules that allow for reading and learning and listening. The simple heuristic is that meetings are bad, but I have come to believe that being involved on the board of SharpSpring could be very beneficial. First, I believe that it can lead to better returns for our fund by giving us a seat at this company’s capital allocation table. SharpSpring has to make critical decisions among growth, capital preservation, and capital raising. The answers are not obvious. I would like a role in helping to flesh out those decisions and communicating them to shareholders. In addition, there have been more than a dozen acquisitions of marketing technology companies including Adobe’s acquisition of SharpSpring direct competitor Marketo at 12X revenue. A similar multiple would imply well in excess of 200% return for current SHSP shareholders. I believe that SharpSpring has an attractive opportunity in front of it, and not selling may also be a very smart decision. I think our partnership would benefit if we had voice at the table.

Finally joining the board of SharpSpring would be an opportunity to learn. Rick Carlson and his team are smart operators facing fierce competition. They are the kind of people I want to back. Rick is committed to building the business and is very thoughtful in his approach. Rick and his team are the kind of people from whom one cannot help but learn. I have no idea what investing insights would come out of participating in the governance of SharpSpring, but if I cannot glean any investing insights from helping to support Rick and his team, it is time to put away the laptop.

I have offered my services to the company. There are very rational reasons for them to accept or decline the offer, and we will see what happens. Joining the board would restrict our ability to sell shares to specified windows of time, but given our projected multi-year holding period, I think it is an acceptable risk. If not, I will help the company find a replacement and avoid the four formal meetings per year. All board fees earned would go to the fund.”

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In Q1 2020, the number of bullish hedge fund positions on SharpSpring Inc. (NASDAQ:SHSP) stock decreased by about 29% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with SharpSpring’s growth potential. Our calculations showed that SharpSpring Inc. (NASDAQ:SHSP) isn’t ranked among the 30 most popular stocks among hedge funds.

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Video: Top 5 Stocks Among Hedge Funds

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Disclosure: None. This article is originally published at Insider Monkey.