Sprout Social

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Sprout Social is a leading provider of cloud-based social media management software, offering a platform for businesses to manage their social media presence, engage with customers, and analyze their social media performance.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Sprout Social operates in the Social Media Management (SMM) software industry.

  • The company primarily generates revenue from subscription fees, offering tiered pricing plans based on the features and functionalities required by customers.

  • Revenues are diversified across various customer segments, ranging from small businesses to large enterprises and agencies.

  • The industry is characterized by intense competition, with numerous players offering social media management solutions. Key competitors include: Sprinklr, Hootsuite, Salesforce Social Studio, and smaller niche players.

  • Key trends in the industry include the increasing adoption of AI and machine learning, the growing importance of video content, and the rise of social commerce.

  • Sprout Social differentiates itself through its focus on user experience, comprehensive feature set, and strong customer support, often referred to as their “premium” positioning.

  • According to their most recent Q3 2024 report, the company grew through the acquisition of Tagger, further enhancing its AI capabilities within the Sprout Social platform.

Moat Assessment: 2 / 5

Sprout Social possesses a narrow moat. Here’s why:

  • Switching Costs (Moderate): While Sprout Social integrates into a customer’s workflow, the integration isn’t deeply entrenched. Businesses can switch to competitors without incurring massive costs in money or time, but there is some inconvenience related to training employees on new platforms. While the platform is “mission critical” according to the company’s CEO, its not like its mission-critical along the same lines of SAP or Oracle. It isn’t a software required in order to keep business running, but rather something used to improve the company’s operations.
  • Intangible Assets (Weak): Sprout Social has built a recognizable brand, but its branding is weaker compared to some other platforms that are far ahead like salesforce and hootsuite.
  • Network Effect (None): The platform does not directly benefit from a strong network effect.
  • Cost Advantages (None): Sprout Social does not have a demonstrably strong cost advantage over other software platforms The low moat is further highlighted by the fact that the SMM software market is characterized by rapid technology change, therefore its difficult to defend the product or business over competitors since it doesn’t take long for a “better mousetrap” to appear Overall: Sprout Social has some advantages in switching costs.

    Risks to the Moat:

  • Increasing Competition: The SMM software landscape is crowded and rapidly evolving, with constant new entrants and feature innovations from existing competitors.
  • Technological Disruption: Social media platforms themselves undergo frequent changes and algorithm updates, which can necessitate significant platform adjustments and potentially erode the value of existing features. A competitor could suddenly provide support for a new social platform quicker than Sprout, further eroding its network effect.
  • Reliance on Third-Party APIs: Sprout Social relies heavily on APIs from social media platforms. Changes to these APIs can disrupt functionality and negatively impact the user experience.

Business Resilience:

  • Revenue Growth The company is still in a high growth phase, therefore it is expected to face competition from new software vendors.
  • Sticky Customers: Sprout Social is a core component for a social media team, especially for ones that are very focused on improving the operations of their social media operations

Financials

The company has solid liquidity and is not expected to have issues in the future. As of Q3 2024 the cash and cash equivalents and marketable securities totalled $181.6 million with no debt.

The company expects to be cash-flow positive for full year 2024, therefore there are no long term going concern with the company. Sprout Social’s gross margins have generally stayed at 75-76%, with management expecting a 75% gross margin for the next few years. However the company has had GAAP Net Losses, with the company hoping to be GAAP profitable by 2025.

Here’s a breakdown of their financials:

  • Revenue Growth:

  • Q3 2024 revenue was $97.1 million, up 33% year-over-year.

  • ARR was $384.6 million, up 32% year-over-year.

  • Profitability:

  • Gross margin was approximately 75%

  • GAAP operating loss was $30.2 million

  • Non-GAAP operating income was $11.6 million.

  • Net loss was $28.2 million

  • Customer Growth:

    • Total customers reached 37,731, representing an increase of 14% year-over-year.

Balance Sheet Health: 4 / 5

  • Liquidity: As mentioned before, the company has solid liquidity with $181.6 cash and cash equivalents and no debt.
  • Profitability Concerns: The company still has GAAP net losses with no clear signs to GAAP profitability, therefore it is not possible to give the balance sheet a 5 / 5

Understandability: 2 / 5

The social media management software industry is difficult to understand as it is filled with lots of buzzwords. The market is constantly shifting. Figuring out which businesses will remain on top in the long-term is also not an easy task. The valuation models that Sprout Social’s management makes is hard to understand.

  • It has high ROIC at over 10%.
  • It also has high growth at about 30% or higher for the next few years.
  • It trades at 14x sales which is definitely high.

Recent Concerns / Controversies

  • There is a controversy surrounding social analytics because of new updates to social media platforms.
  • Some analysts have expressed concerns about Sprout Social’s long-term growth prospects and competitive position in light of the industry competition
  • Some investors are worried the company will not be GAAP profitable in the future. However the CEO has noted its the company’s top priority