Earlier this week, Sprout Social (SPT 0.15%) released a strong third-quarter report, beating revenue and guidance estimates.The stock has risen a whopping 178% since its IPO last December, a big win for any owners of the company. Let's see whether it's too late to get on the Sprout Social train.
What is Sprout Social
Without help, large companies can struggle to manage social accounts across many different platforms. Sprout Social lets its customers combine messaging, data, and workflows across all their social media accounts.
Image source: Getty Images.
Sprout's cloud-based system aims to save its customers time and effort tracking down customer complaints, creating posts, and other things that go into building a consistent and quality brand across all the important networks.
Q3 earnings
Total revenue last quarter was $33.7 million, with a GAAP operating loss of $6.9 million. Annual recurring revenue (ARR) grew 30% to $141.9 million. Since Sprout Social is a subscription business, ARR offers a very important metric for valuing its operations. The company's customer count grew from 23,066 to 25,556 over the past year, and it also launched new integrations with Glassdoor, Slack, and Twitter Pro Video, further enhancing its value proposition.
While the company is not yet profitable on a GAAP basis, gross margins have been consistently high, nearly reaching 74% this quarter. This allows Sprout Social to spend more on R&D and marketing than other companies, without burning boatloads of cash. It also indicates that Sprout Social could achieve juicy operating and net profit margins at scale.
Future potential
With over 25,000 customers at the end of the quarter, some investors may be worried about Sprout Social running out of customers to add to its platform. But you can make a solid case that many businesses could benefit from paying to help with their social feeds, especially when those companies are large and consumer-facing.
With 3.8 billion people using social media globally -- a total that has grown 12.5% annually since 2015 -- companies need a strong presence across a variety of platforms to build a successful brand in the 21st century. This reach has forced even legacy companies like Sony to try and become competent on services such as Instagram, Twitter, and Facebook.
Sprout Social's own numbers back up this trend. While the company didn't release any churn or retention numbers for existing customers, 2,790 customers now contribute over $10,000 in ARR for the company, up 42% from the same time last year. Brands like Electronic Arts, Taco Bell, and Sony signed on this quarter, showing that large businesses find value in using Sprout Social to manage all their social accounts.
Sprout Social is the largest company that provides social media management software, but it's not alone in the market. Privately held start-ups AgoraPulse and Eclincher have similar offerings and strong customer ratings. With low switching costs and no network effects, Sprout Social will need to continually improve its product offering in order to stave off this competition.
Sprout Social does trade at a premium valuation (its trailing price-to-sales ratio is a tad under 20, compared to the industry average of 8-10) and has never generated an annual profit, or shown signs of getting closer to one. However, it has a large tailwind, is the biggest company in the space, and is continually signing on top brands to its platform. If investors can stomach any potential volatility and hold onto this business for five-plus years, they may be well rewarded.
