Sprout Social has gotten torched over the last six months - since January 2025, its stock price has dropped 35% to $20.56 per share. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Sprout Social, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Sprout Social Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are two reasons why we avoid SPT and a stock we'd rather own.
1. Operating Losses Sound the Alarms
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Sprout Social’s expensive cost structure has contributed to an average operating margin of negative 13.9% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Sprout Social reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Sprout Social has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7.2%, subpar for a software business.
Final Judgment
Sprout Social isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 2.6× forward price-to-sales (or $20.56 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at one of our top digital advertising picks.
Stocks We Like More Than Sprout Social
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