Software company Sprout Social stunned Wall Street today as it plummeted to $55.34, marking a -10.7% change compared to the S&P 500 and the Nasdaq indices, which logged -0.7% and -1.0% respectively. SPT is -25.92% below its average analyst target price of $74.7, which implies there is more upside for the stock. As such, the average analyst rates it at buy. Over the last year, Sprout Social has lagged behind the S&P 500 by -29.0%, moving -45.6%.
The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 26.5 as of third quarter of 2022. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Sprout Social's gross profit margin trends:
- 2021 gross margins: 75.1%
- 2020 gross margins: 73.7%
- 2019 gross margins: 72.6%
- 2018 gross margins: 73.4%
- Average gross margin: 73.7%
- Average gross margin growth rate: 0.8%
- Coefficient of variability (lower numbers indicating more stability): 1.4%
We can see from the above that Sprout Social's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.
Sprout Social's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
- 2021 free cash flow: $13,891,000.00
- 2020 free cash flow: $-15,367,000.00
- 2019 free cash flow: $-15,174,000.00
- 2018 free cash flow: $-19,335,000.00
- Average free cash flow: $13,891,000.00
- Average free cash flown growth rate: 70.2%
- Coefficient of variability (lower numbers indicating more stability): 170.9%
Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, SPT is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the third quarter of 2022, the mean P/B ratio of the technology sector is 5.57, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Sprout Social's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 21, so it's likely that equity investors are over-valuing the company's assets.
As of third quarter of 2022, Sprout Social is likely overvalued because it has a negative P/E ratio, an elevated P/B ratio, and an irregular stream of negative cash flows with an upwards trend. The stock has mixed growth indicators because of its consistently strong gross margins that are stable, and no published PEG ratio. We hope this analysis will inspire you to do your own research into SPT's fundamental values -- especially their trends over time.
For more daily analysis delivered to your digital doorstep, subscribe to our free newsletter today!
