On Friday, Piper Sandler adjusted its stance on Sprout Social Inc . (NASDAQ: NASDAQ:SPT), moving from an Overweight rating to Neutral. The firm also set a new price target for the stock at $40, a decrease from the previous $66 target. The downgrade follows Sprout Social's first-quarter results, which did not meet the expected recovery after a challenging fiscal year 2023, marked by customer churn at the lower end of the market.
The analyst from Piper Sandler noted that the first-quarter revenue for Sprout Social fell short of guidance. This miss was attributed to the annual recurring revenue (ARR) not rebounding as anticipated. The company's financial forecast for fiscal year 2024 was also revised, with a $20 million reduction in the top-line revenue, suggesting a growth rate in the high teens for the second half of the year, even with the integration of Tagger.
Despite a framework that anticipates over 20% compound annual growth rate (CAGR) for the next five years and nearly 20% free cash flow (FCF) margins by 2028, the analyst expressed difficulty in foreseeing a quick resurgence in investor confidence. This skepticism is due to the ongoing issues with ARR and total customer metrics, coupled with expectations of a year heavily weighted towards the latter half.
The lowered price target to $40 reflects the firm's recalibrated expectations for Sprout Social's growth trajectory and financial performance. The report indicates that the company's recent trends in ARR, which continued from the previous fiscal year into the first quarter, are a significant factor in the revised outlook.
Piper Sandler's move to a Neutral rating suggests a more conservative view of Sprout Social's stock, given the less optimistic assessment of the company's near-term growth prospects and investor sentiment. The analysis concludes with a recognition of the challenges Sprout Social faces in reigniting growth and investor enthusiasm in the short term.
InvestingPro Insights
As investors digest the recent downgrade of Sprout Social Inc. (NASDAQ: SPT) by Piper Sandler, InvestingPro data shows that the company's gross profit margin remains impressive at 77.14% for the last twelve months as of Q4 2023. Despite the challenges highlighted in the analyst's report, this strong margin underlines Sprout Social's ability to maintain profitability at the core operational level.
However, the stock's performance has been underwhelming, with a 1-month price total return of -14.03% and a year-to-date return of -21.63%, indicating a bearish trend in the short term. This aligns with the InvestingPro Tip that the stock has fared poorly over the last month. Additionally, the Relative Strength Index (RSI) suggests that the stock is currently in oversold territory, which could be of interest to potential investors looking for entry points.
InvestingPro Tips further reveal that analysts predict the company will be profitable this year, providing a glimmer of hope for a turnaround in the near future. For readers interested in a deeper analysis, there are 9 more InvestingPro Tips available, which can be found on the Sprout Social page at InvestingPro. To enhance your investment research, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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