On Friday, Goldman Sachs revised its stance on Sprout Social Inc . (NASDAQ: NASDAQ:SPT), downgrading the stock from Buy to Neutral and adjusting the price target to $44 from the previous $80. The firm cited a potential near-term disruption to organic growth as the company shifts its focus to higher-end markets, an element that was initially expected to be a more immediate growth driver.
The investment bank acknowledged Sprout Social's long-term potential to grow and capture more of the upmarket segment, especially considering the company's expanding partnership with Salesforce (NYSE:CRM) and the hurdles its competitors are facing. However, the current economic climate and a lack of clear insights into the company's sales pipeline conversion have introduced additional risks, prompting a more cautious outlook on the stock's near-term performance.
Goldman Sachs expressed the need for evidence that Sprout Social's direct sales and channel strategies can generate stronger top-of-funnel and conversion rates than those reflected in the first quarter results and the approximate 5% reduction in the full-year guidance. The firm suggested that it might take some time for these results to be reflected in the company's financials.
Additionally, the decision by Sprout Social to stop reporting total customer numbers and annual recurring revenue (ARR) has made it more difficult to assess the impact of the company's focus on customers with an annual contract value (ACV) of less than $10,000. This change, while not uncommon for software companies targeting higher-end markets, has further decreased the visibility into the factors driving future performance amid changes to the business model.
Since being added to the Americas Buy List on July 6, 2023, Sprout Social's shares have seen a modest increase of 2%, or a decrease of 16% when considering after-market movement, compared to a 15% rise in the S&P 500 over the same period.
InvestingPro Insights
In light of Goldman Sachs' recent revision of Sprout Social Inc., current data from InvestingPro provides additional context for investors considering the stock's potential. Impressively, Sprout Social boasts a gross profit margin of 77.14% for the last twelve months as of Q4 2023, signaling effective cost management and a strong competitive edge in its sector. Despite the company's challenges, analysts predict Sprout Social will become profitable this year, which may reassure investors looking for long-term growth.
However, the stock has experienced a notable decline over the past month, with a 14.03% drop, and is currently trading at a high Price / Book multiple of 18.88, suggesting that the stock is priced at a premium compared to its book value. This aligns with the concerns raised by Goldman Sachs regarding the near-term growth disruption as the company pivots its strategy.
For investors seeking a deeper analysis, InvestingPro offers additional insights and metrics, including 9 more InvestingPro Tips to help evaluate the company's prospects. Utilize coupon code PRONEWS24 for an extra 10% off a yearly or biyearly Pro and Pro+ subscription to gain access to these valuable resources.
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