Sprout Social Inc. (NASDAQ: SPT) is a full-service social media management tool. The company has been performing well in this competitive space and offers a centralized location for marketing teams to effectively manage their social media campaigns. The company’s stock has been delivering a solid performance over the past 12 months. However, the stock is significantly overvalued, according to a thesis by Smallcapconnoisseur on Reddit.
Sprout operates as a content management system for social media sites and offers easy-to-use software and visually appealing dashboards and reports. The software allows for content management across Twitter, Facebook, Instagram, Pinterest, LinkedIn, Google, and YouTube – enabling post scheduling, engagement, and analytics across all platforms. The company struggled to establish an effective moat, according to the thesis.
For three reasons, Sprout is believed to be significantly overvalued, according to thesis. Firstly is its revenue growth rate; the company has seen significant growth in revenues, with an increase of 75.43% and 30.43% in core revenues for 2018 and 2019 respectively. However, future revenues are expected to grow at a slightly slower rate as the market for social media content software matures and market entrants are able to take market share. Secondly, Sprout has been unable to maintain an effective moat in order to reach profitability. Thirdly, Sprout’s inability to differentiate itself through either product or target market is resulting in increased spending on marketing and advertising. This situation will outpace its revenue growth and keep it from profitability.
Talking about Sprout’s weaknesses, the thesis notes that Sprout’s gross profit appears strong, but it should maintain lower gross profit margins as software companies do. Sprout’s gross margin hovering around 25% over years 2017-2019, while its biggest competitor Hubspot’s gross profit margin is 19.26% for 2019.
This leads us to believe Hubspot is more efficient in offering its products and services to its customers than Sprout is. Hubspot’s average annual growth rate in its core revenues hovers around 30-40%. Although this rate is slightly lower than Sprout posted in 2018 of 75.43%, it controls significantly more market share.
Sprout’s primary threat is its inability to gain significant market share. Its marketing spend appears to be less effective than its competitor Hubspot, which expands its selling and marketing expenses by roughly 25-30% per year, whereas Sprout’s expands at roughly 50% per year. Despite this, Hubspot is growing at a comparable rate to Sprout even though it controls roughly 6x as much market share.
If Sprout is unable to gain more market share in a reasonable time period going forward, profitability will be out of reach. Their cash burn rate for 2019 was nearly 33%, and without more rounds of funding they could be facing a liquidity problem within a few years.
Meanwhile, Sprout Social, Inc. (NASDAQ:SPT) saw an increase in activity from the world’s largest hedge funds in recent months. SPT was in 19 funds’ portfolios at the end of the second quarter of 2020, versus 16 funds in our database with SPT holdings at the end of March. However, our calculations also showed that SPT isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).
Disclosure: None. This article is originally published at Insider Monkey.