When investors want to get into a business, they will take whoever is there. It doesn’t matter if someone else dominates the niche, they buy the entity that is public. That explains the $1.5 billion value of Sprout Social (NASDAQ:SPT), and the 80% gain enjoyed by Sprout stock since its December IPO.
Sprout sells software for managing social media. For the first three months of 2020 it had revenue of $30.5 million, and a net loss of $10.5 million, 21 cents per share. For the second quarter, to be reported August 5, analysts expect a smaller loss of 15 cents on slightly higher revenue of $31.3 million.
Investors are paying 13.3 times revenue for Sprout stock. It might be justified if the company was dominating its niche.
The trouble is it’s not.
Sprout Stock Faces Competition
Software is a business where, once the niche is established, the winner dominates and the rest pound sand.
Social management software, sold as a service, is a crowded niche right now. But, except for Sprout Social, the public can’t invest in it.
The market leader, however, is Hootsuite. Hootsuite claims to have over 15 million users, including 80% of the Fortune 1000, and is backed by almost $300 million in venture funding. In March, Sprout Social had about $135 million of cash, mostly from its IPO.
Hootsuite has about 200,000 clients, while Sprout Social has about 23,000 paying customers. Forrester calls Hootsuite the clear leader in social engagement. In a recent interview, Hootsuite CEO Tom Keiser estimated his company’s size at $200 million. He also said he expects regulation to tame the advertiser boycott at Facebook (NASDAQ:FB).
Making Social Work
This brings up a second challenge for Sprout Social, which is getting advertisers to trust social media again.
If the social media management industry is growing in 2020, it’s due to the pandemic — and defensive reasons. Companies want to know what’s being said about them, so they can respond quickly. Tools like Sprout Social and Hootsuite give them that visibility.
But that’s not the same thing as using social media to drive results. The Facebook boycott is a headache. The recent problems at Twitter (NYSE:TWTR) — which recently saw a lot of its celebrity accounts hacked — compounds the problem.
In March, Sprout’s Social Media Index polled about 1,000 marketers and an equal number of consumers. It said 89% of people who follow a brand on social media become customers, and 57% use social media to learn about new products and services. Sprout CMO Jamie Gilpin wrote that social is still “a powerful channel for brand awareness” and “a proven business accelerator.”
But much about social media, its use and abuse, remains up in the air. So does the future of all companies that seek to train marketers in this new world, including Sprout Social.
The Bottom Line on Sprout Stock
While cloud-based tools for evaluating cloud-based social media have been around for years, the industry has yet to mature.
Sprout Social still has a chance to gain a foothold.
But if you’re buying Sprout stock today, you’re speculating. Sprout doesn’t lead its niche and the niche has yet to fully evolve. Software is indeed eating the world, but not every software company will be invited to the feast. Only the winners will get a seat at the table.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in FB.