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  • Writer's pictureBrett Schafer

Not So Deep Dive: Sprout Social Stock

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  3. Apple Podcasts

Show Notes

(Ryan) What they do: Sprout Social is a centralized platform for popular individuals/large organizations to manage all their social media pages in a single place. The key components of the platform include engagement (inbox, mentions, social CRM), publishing (scheduled content), analytics, business intelligence, and some additional features. And it’s a business-to-business SaaS model that charges on a per-seat basis.

Basically, if you’re on the social media or even public relations team at a big company you’re probably working in Sprout or some sort of a competing system. And they operate across almost all socials. Twitter, facebook, instagram, pinterest, LinkedIn, Google, Reddit, Glassdoor, Youtube and even commerce platforms like Facebook Shops or Shopify.

(Ryan) History: Sprout Social was founded in 2009 by now CEO Justyn Howard. At the time, he was employed at an enterprise software company and he was looking for a tool that would help him communicate with consumers. So he found 3 other people to help him build the first platform all who still work at the company (Aaron Rankin, Gil Lara, and Peter Soung) and they launched the first version in 2010.

From there, it sounds like they found pretty strong product market fit and were able to grow their customer base quickly. With the early success, they also raised several rounds of VC funding and were able to expand their workforce. They IPO’d in 2019 and today they are headquartered in Chicago with roughly 900 employees across the whole company.

(Brett) Industry/Landscape/Competition:

  • They believe there is a $44 billion current addressable market and in 2025 will be a $100 billion addressable market for their services (I call BS)

  • Tons of competitors. Hootsuite, Zoho Social, Sprinklr, Salesforce (winding down due to partnership).

  • Will social media management software actually become a gigantic industry?

(Brad) Management and Ownership:

​​1) Founder/CEO is Justyn Howard

- doing this since 2009 so not a lot of other experience

- 98% Glassdoor rating with almost 400 reviews so decent sample size

2) CFO is Joe Del Preto

- Since 2017

- Former Controller at Groupon

- VP of Finance at Echo Global Logistics -- added to conduct a successful IPO after a failed first attempt and fostered some really nice compounding with the firm.

- Former PwC Senior Accountant and Auditor -- like that.

3) Aaron Rankin is the CTO and other founder -- again young guy without a lot of experience (like us) -- IT Architect at IBM, Engineer at Endeca


- Blackrock owns 3% of total voting power vs. 2% YoY with Vanguard owning 2.8%

- Howard owns 26% of the voting power and Rankin about 24% for 50% between the two of them vs. 52% YoY… interesting benchmark.

(Brett) Valuation:

  • Market cap of $2.62 billion, ticker SPT

  • Enterprise value of $2.44 billion (explain)

  • EV/s of 10.2 using ARR

  • EV/GP of 13.4

  • Don’t believe any other metrics are useful right now

  • 2.76 million potentially dilutive securities vs. 54.5 million shares outstanding

(Ryan) Earnings:

  • Q1 Revenue of $57.4M, up 41% YoY

  • $239.1M in ARR, up 39%

  • 76% gross margin

  • On their Q1 revenue, they generated $5.1M in FCF (9% FCF margin)

  • 32,800 total customers, up 17% YoY

  • Customers contributing >$50k in ARR reached 692, up 97% YoY

(Brad) Balance sheet and liquidity:\

Balance sheet:

- No debt

- $40M credit revolver which expired un-renewed in January.

- $81.6 million in cash + another $100 million in marketable securities

- profitable

- about 49 million shares issued with 46 million outstanding -- vs. about 48.6 million issued YoY.

- Really clean.

Anecdotal Evidence:

  • (Ryan) Watched a long tutorial on Youtube. Platform seems pretty comprehensive. It’s more than just a combined feed, there’s a lot to it.

  • (Brett) Reviews look good. Pricing seems expensive for any small teams.

  • (Brad)

Future growth opportunities:

  • (Ryan) Supporting TikTok. It still is not a part of the platform yet. Justyn Howard was asked about it on the CC, and his answer was “No proper update today. Stay tuned.” So that could certainly be helpful, but I also think the business intel/analytics component could become more meaningful over time. Being able to report to organizations what sort of engagement works best has to be helpful.

  • (Brett) A bit of a lazy one here but it is a pretty simple growth story. International growth. People in Asia, Africa, LatAm all use social media, possibly even more than the West, for marketing. Big opportunity to go after customers

  • (Brad) metaverse advertising and heavy facebook ad tech spend could insulate them from IDFA targeting headwinds and push ad budgets more to 1st party social environments.

Highlights and lowlights:

  • (Ryan) Highlights: Seems like this addresses a growing need for businesses (good product-market fit). And they talked about that on the 10-K, they said “In 2021, the majority of our new customer revenue resulted from our trials and other inbound sources.” Lowlights: Having said that, they spend a big chunk (45%) of their revenue on S&M.

  • (Brett) Highlights: All good software is deflationary, and this feels like it fits that definition (replaces employees, saves time), good unit economics, best-in-class for upper end of the market (made Salesforce quit). Lowlights: Is this a company or a product? G&A as a % of revenue is way too high, how many companies are truly going to want this? If it takes some pushing to get adoption, will S&M spend be permanently high?

  • (Brad) Highlight – really long tenures and management scores/culture. Lowlights – CEO loves to hang out on Twitter

Bull Case:

  • (Ryan) I’ll try to bake in some positive assumptions and see where I get. Let’s say over the next 5 years, customer count doubles, total spend from customers is twice what it is today, and they get to a free cash flow margin of 20%. (For reference, customer count is growing at 17%/year right now, DBNRR is ~115%, and FCF margin is ~10%) That would be $956M in ARR, and $191M in FCF. Let’s assume it trades at 25x. That would be $4.8B or almost double today’s market cap.

  • (Brett) You get bought out by Salesforce at a nice little premium.

  • (Brad) They’ve found a fast-growing niche within the ad-tech space and have a unique value prop that will insulate them from the competition coming to eat their lunches.

Bear Case:

  • (Ryan) They don’t hit the numbers discussed above. Which seems very possible.

  • (Brett) You get bought out by Salesforce below your cost-basis

  • (Brad) Companies like The Trade Desk begin to offer a service similar to this. They’re already running consolidated, data-driven campaigns and if there’s enough social demand (where they already exist) they could feasibly enter.

Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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Listen On: Spotify Apple Podcasts Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capita

Listen On: Spotify Apple Podcasts Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capita

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