What Happened?

Shares of social media management software company Sprout (NASDAQ:SPT) fell 16.5% in the morning session after the company reported weak third-quarter earnings. Its EPS and revenue guidance for next quarter missed Wall Street's estimates. Notably, remaining performance obligations (RPO - leading revenue indicator) fell below consensus estimates during the quarter, raising concerns about sales heading in the last quarter of the year. Overall, this quarter could have been better.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Sprout Social? Access our full analysis report here, it’s free.

What The Market Is Telling Us

Sprout Social’s shares are quite volatile and have had 17 moves greater than 5% over the last year. But moves this big are rare even for Sprout Social and indicate this news significantly impacted the market’s perception of the business. 

The biggest move we wrote about over the last year was 6 months ago when the stock dropped 37.3% on the news that the company reported weak first-quarter results with its full-year revenue guidance below expectations. Notably, full-year revenue guidance was lowered to a range of $405.0- $406.0 million (vs. previous expectations of $425.3 - $425.5 million). This is never a good sign. 

Key top line metrics, including ARR (annual recurring revenue), billings, and revenue, also missed analysts' estimates during the quarter. 

The company called out a couple of factors contributing to the top line underperformance: Notably, the strategic focus shifted from small and medium-sized businesses (SMBs) to large enterprise customers. This change redirected resources towards closing high-value enterprise deals, resulting in less emphasis on generating a new sales pipeline. Consequently, the company experienced a decline in net new revenue additions.

Also, the company called out an accounting change, which resulted in a $4.4 million reduction in Q1 sales. In addition, Sprout Social announced a CEO succession plan. 

Overall, this was a bad quarter for Sprout Social. Following the weak performance, Wall Street analysts downgraded the stock's rating. Baird lowered the stock's rating from Outperform to Neutral and trimmed the price target from $72 to $45. Similarly, Piper Sandler downgraded SPT's rating from Overweight to Neutral and lowered the price target from $66 to $40.

Sprout Social is down 52.3% since the beginning of the year, and at $27.09 per share, it is trading 59% below its 52-week high of $66.14 from January 2024. Investors who bought $1,000 worth of Sprout Social’s shares at the IPO in December 2019 would now be looking at an investment worth $1,689.

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