On Thursday, Sprout Social Inc . (NASDAQ: NASDAQ:SPT) stock faced a downgrade by KeyBanc, shifting from Sector Weight to Underweight. The new price target is set at $28.00, reflecting concerns over the company's recent performance. KeyBanc highlighted that the beginning of 2024 has been unstable for Sprout Social, indicating a year weaker in bookings than initially reported.
The company's transition to prioritizing annual contracts over monthly ones has been a multi-year effort. KeyBanc acknowledges the strategy as seemingly beneficial but points out that it complicates the evaluation of the company's reported metrics.
These metrics, such as the current remaining performance obligation (RPO) and current bookings, are not as reliable as they appear due to the average contract length of less than a year.
KeyBanc's analysis suggests that when adjusting Sprout Social's reported figures to account for the duration of contracts, the first half bookings may not have just slowed down but could have experienced a year-over-year decline on an organic basis. This adjustment reveals a potential overstatement of the company's health as indicated by the standard metrics.
The firm's concerns stem from the fact that while converting monthly customers to annual contracts may inflate RPO and bookings, it does not necessarily reflect an increase in the underlying business growth. This shift in customer billing practices has led to a distortion of the metrics that are typically used to gauge the company's performance.
Sprout Social has been navigating this strategic shift for some time, which aims to secure more significant, long-term customer commitments. However, the impact of this strategy on the company's reported metrics has raised questions about the actual health of its business.
The downgrade by KeyBanc serves as an indicator of the challenges Sprout Social faces in its pursuit of larger annual deals, and the need for investors to consider the nuances of reported metrics amidst strategic changes.
The firm's decision reflects a cautious stance on the stock's prospects, as the actual bookings performance may not align with the reported numbers due to the strategy's distorting effects.
In other recent news, Sprout Social reported a strong performance in the second quarter of 2024, with a year-over-year (YoY) revenue increase of 25% to $99.4 million. The company also announced significant leadership changes, including the appointment of Ryan Barretto as the new CEO and Erika Trautman as the new Chief Product Officer.
The number of customers contributing more than $10,000 and $50,000 in annual recurring revenue (ARR) saw substantial growth, indicating a positive trajectory for the company.
Sprout Social's subscription revenue accounted for $98.5 million of the total, marking a 25% increase YoY. The company ended the quarter with $93.2 million in cash, cash equivalents, and marketable securities. Projections for Q3 revenue range between $101.9 million and $102.1 million, with full-year 2024 revenue expected to land between $405.0 million and $406.0 million.
In terms of future expectations, Sprout Social forecasts a non-GAAP operating income between $6.5 million and $7.5 million for Q3, and between $28 million to $29 million for the full year 2024.
Notable customer acquisitions, including Salesforce (NYSE:CRM) and Honda (NYSE:HMC), and successful product developments, such as the Tagger product, contribute to the company's optimistic outlook. These recent developments underscore Sprout Social's strong market position and potential for continued growth.
InvestingPro Insights
As Sprout Social Inc. (NASDAQ: SPT) navigates through strategic alterations and faces downgrades, real-time data from InvestingPro offers a multifaceted view of the company's financial health. With a market capitalization of $1.94 billion, Sprout Social is trading at a high Price / Book multiple of 12.73, which may raise valuation concerns for some investors. Despite the challenges highlighted by KeyBanc, the company boasts impressive gross profit margins of 77.09% over the last twelve months as of Q2 2024, suggesting a strong ability to monetize its services.
InvestingPro Tips also shed light on the company's performance and future outlook. Analysts have revised their earnings upwards for the upcoming period, indicating a potential shift in the company's trajectory. Furthermore, while Sprout Social operates with a moderate level of debt, it's important to note that it has not been profitable over the last twelve months. However, analysts predict the company will turn a profit this year, which could be a pivotal point for investors to watch.
For investors seeking a deeper dive into Sprout Social's financials and future projections, InvestingPro offers additional tips and insights. With a total of nine InvestingPro Tips available, including perspectives on the stock's performance over the last six months and its lack of dividend payments, a comprehensive analysis is just a click away at https://www.investing.com/pro/SPT.
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