Sprout Social (NASDAQ:SPT) shares plummeted 40% to $28.82 on Friday after the social media software provider reported weaker-than-expected first-quarter revenue. Based on initial analyst reactions, the Wall Street community can’t seem to agree if the sell-off is an opportunity or reason for caution. Nonetheless, I believe the sell-off presents an opportunity.
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With digital transformations unfolding across industries, Sprout Social has set out to be a one-stop social media management platform for businesses around the world. Its cloud-based software combines social content, messaging, and data to effectively manage social media campaigns. From DoorDash (NASDAQ:DASH) to Kraft Heinz (NYSE:KHC) to the NBA’s Denver Nuggets, some 30,000 organizations rely on Sprout Social.
Up until Friday’s earnings release, Sprout Social shareholders could rely on accelerating top-line growth. However, the company announced that Fiscal 2024 first-quarter revenue grew 29% year-over-year to $96.8 million. This marked a slowdown from the 34% revenue growth reported for the fourth quarter of Fiscal 2023, striking fear into the market that peak growth is behind us.
On the bright side, Sprout Social grew its EPS by 67% to $0.10, blowing past the $0.01 consensus estimate. It marked the ninth consecutive time that the company beat Wall Street’s EPS forecast after going public in December 2019. Nevertheless, this did little to calm panicked investors from dumping the stock.
Given Sprout Social’s impressive earnings beat history and ability to deliver strong revenue growth in a cautious enterprise spending environment, I think the market overreacted. The company’s long-run growth prospects tied to a digital future and depressed share price are reasons to take a bullish stance here.
Some sell-side research firms share my sentiment. Others aren’t so convinced that Sprout Social stock won’t face more downside pressure. Let’s check in on some of Wall Street’s early reads.
Can SPT Sprout New Gains from Here?
A whopping 10 analysts have already refreshed their opinions on Sprout Social following the company’s May 2 earnings release. Four analysts hopped off the bull and downgraded the mid-cap from Buy to Hold.
Goldman Sachs (NYSE:GS) analyst Adam Hotchkiss was surprised that Sprout Social’s decision to move upmarket didn’t have a more positive impact on organic growth. He believes that the company’s budding relationship with Salesforce (NYSE:CRM) should support upmarket share gains and long-term growth but that low visibility into pipeline conversion warrants a downgrade to Neutral.
Clarke Jeffries at Piper Sandler also downgraded SPT to Hold. The analyst cited disappointing annual recurring revenue (ARR) figures and the company’s decision to stop reporting ARR and customer count metrics as near-term sources of risk. Management’s lowered 2024 revenue guidance of $405.5 million at the midpoint also contributed to the downgrade.
Meanwhile, five-star Canaccord (OTC:CCORF) analyst David Hynes doesn’t agree with the downgrades. Although he slashed his price target from $70.00 to $50.00, Hynes maintained a Buy rating on Sprout Social. Although the revised 2024 growth forecast of 22% is a big step down from the prior 28%, the analyst thinks the stock can recover over the next 12 months.
Scott Berg at Needham also sees the sell-off as an opportunity. The analyst kept Sprout Social at a Buy, choosing to view the growth slowdown as temporary. Berg thinks favorably of the company’s push into the higher end of the software market and thinks it will lead to long-term success. A healthy demand environment and accelerating growth in the recently acquired Tagger influencer marketing business were also cited as reasons for optimism.
Sprout Social’s Market Is in the Budding Stage
Another reason to lean bullish on Sprout Social is the early nature of the social media management market. According to a recent Harris Poll titled “The 2023 State of Social Media: AI & Data Take Center Stage,” 90% of U.S. and U.K. business leaders believe their company’s success will depend on the effective use of social media data and insights. Four out of five executives see their social media budgets increasing over the next three years.
This suggests that Sprout Social has only scratched the surface of getting organizations to embrace its software. The company estimates that less than 5% of businesses have adopted a social media platform. Low penetration in a fast-growing influencer marketing space that is estimated to top $120 billion in 2025 makes me want to look past Sprout Social’s current challenges in favor of the long-term growth opportunity.
What Is the Consensus Price Target for SPT Stock?
Based on analyst ratings over the past three months, the average Sprout Social stock price target is $72.17. However, since the stock may be subject to additional analyst revisions in the wake of Friday’s earnings report, looking at a subset of this data may be beneficial. If we take only the revised price targets issued since the first quarter update, the average price target is $47.43. Still, this implies more than 67% upside from the most recent close.
The Bottom Line on SPT Stock
Sprout Social suffered a brutal sell-off after posting slower-than-expected first-quarter revenue growth and lowering its 2024 growth outlook. Some analysts think this makes the stock dead money this year. Others expect the company to benefit from strong social media management software demand and the stock to recover.
