Sprout Social Stock Up 245% This Year; Why There’s More to Come

SPT StockSprout Social Inc Is a Must-Have Social Media Stock

The ongoing COVID-19 pandemic has provided strong tailwinds for companies in the digital and social media space. Even as the economy reopens and we move toward some sense of normalcy, the tailwinds for the segment will continue to be strong.

A social media stock that many of you have likely never heard of is Sprout Social Inc (NASDAQ:SPT).

The company provides a cloud-based platform to help businesses manage and broaden their social media accounts on all of the major social media channels. It’s a critical undertaking that needs to be executed well. Sprout Social Inc operates in 100 countries.

Sprout Social stock debuted with its initial public offering (IPO) price at $17.00 in December 2019.

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SPT stock has rocketed 245% in 2020 after initially plummeting to $10.54 during the March sell-off.

Since its March low, Sprout Social stock has been in a strong upward trade channel above its 50-day and 200-day moving averages. SPT stock easily recovered to its pre-COVID-19 level and set a new high on December 17.

Chart courtesy of StockCharts.com

The easy gains may have been made, but for those with a longer-term view, Sprout Social stock has above-average potential for strong price appreciation.

Watch for another breakout attempt at channel resistance.

Strong Revenue Growth Supports Bull Thesis for SPT Stock

Sprout Social Inc only has three years of public records, but the company’s revenue growth has been impressive so far, more than doubling from 2017 to 2019.

Fiscal Year Revenue (Millions) Growth
2017 $44.8 N/A
2018 $78.8 75.9%
2019 $102.7 30.3%

(Source: “Sprout Social Inc. Cl A,” MarketWatch, last accessed December 23, 2020.)

But, as is generally the case with companies that begin to accelerate their revenues, Sprout Social is expected to see its growth rate normalize.

For full-year 2020, the company is expected to ramp up its revenues by 28.0% to $131.4 million and follow that with 27.4% growth to $167.5 million in 2021. Despite the lower growth rate, the expectations are still strong. (Source: “Sprout Social, Inc. (SPT),” Yahoo! Finance, last accessed December 23, 2020.)

Still in its early stages, Sprout Social Inc is likely years away from positive earnings before interest, taxes, depreciation, and amortization (EBITDA).

Fiscal Year EBITDA (Millions) Growth
2017 -$20.7 N/A
2018 -$16.8 18.7%
2019 -$41.9 -149.9%

(Source: MarketWatch, op. cit.)

The company is also likely years away from profits on both a generally accepted accounting principles (GAAP) and adjusted earnings-per-share (EPS) basis.

Fiscal Year GAAP Diluted EPS Growth
2017 -$0.46 N/A
2018 -$0.43 7.0%
2019 -$0.96 -125.3%

(Source: MarketWatch, op. cit.)

As Sprout Social Inc grows its revenues, investors want to see the company manage its expense side and move toward positive EBITDA and profits.

There is some optimism. The company is expected to narrow its adjusted loss to $0.45 per diluted share in 2020, compared to its adjusted loss of $1.16 per diluted share in 2019. (Source: Yahoo! Finance, op. cit.)

SPT stock is on target to outperform its consensus 2020 EPS estimate after beating the estimates in the first three quarters.

Sprout Social Inc’s free cash flow (FCF) has been negative, and it’s years away from becoming positive. The company’s FCF improved in 2019, and with higher expected revenues, it could continue to improve in the next few years.

Fiscal Year FCF (Millions) Growth
2017 -$15.0 N/A
2018 -$19.3 -28.8%
2019 -$13.8 28.8%

(Source: MarketWatch, op. cit.)

Sprout Social will have time to properly execute its growth strategy. The company’s balance sheet has about $142.0 million in net cash and strong working capital. (Source: Yahoo! Finance, op. cit.)

Analyst Take

Institutional ownership of Sprout Social stock is heavy and has been rising. About 188 institutions hold a 91% stake in the outstanding shares of Sprout Social Inc. Goldman Sachs Group Inc (NYSE:GS) is the top investor in SPT stock, at 19.9%. (Source: Yahoo! Finance, op. cit.)

The key lockup expiry for Sprout Social stock has passed. Despite the option for the initial buyers to sell, insiders added a net 3.1 million shares during the last six months. (Source: Yahoo! Finance, op. cit.)

While SPT stock has more than doubled in 2020, I’m confident that its share price will be much higher in a few years as the social media space becomes more critical for companies.