Edge
Sprout Social has several advantages over other players, including Sprinklr, in this space.
First, Sprout Social holds a significant technical edge over Sprinklr because its platform is built on a single-code base, whereas competitors typically use an acquisition bolt-on solution. This difference impacts users in subtle but important ways, particularly in terms of the seamless UX/UI experience. It is also the single-code base architecture that allows it to be natively integrated and embedded into Salesforce products, providing the same look and feel for the customer as well as the functionality that one would expect from a native product. In 2020, Salesforce announced it would retire its own product, Social Studio, and recommended Sprout Social as the preferred partner for Salesforce customers. This partnership offers exclusive integration between Salesforce’s Service and Marketing Clouds, Slack, Tableau, and more, allowing two-way communication and user action across these platforms. Customers now have the ability to achieve a full “omni-channel” view of their customers, including social media data—which is becoming increasingly relevant. Social media data is contextual and descriptive, providing insights that email, and phone records cannot. This trend is not only likely to exist in the future, but strengthen. What this does for Sprout Social is that it creates a distinct value proposition for clients that competitors cannot match. The typical enterprise customer simply does not have a better reason to choose Sprinklr or any other solutions in this space, even with better features. This is already demonstrated by the higher win-rates from Sprout Social.
Second, Sprout Social’s product is far simpler to use compared to competitors like Sprinklr. For example, Sprinklr takes 1-2 months to implement and another 6 months to train users. In contrast, Sprout Social’s solution is often described as intuitive and user-friendly, with a common phrase being “trial in the morning, use it by the afternoon.” Most users can become proficient within 1 to 2 weeks. This simplicity is so notable that Sprout Social’s sales process is “experiential,” allowing potential customers to try the product immediately while sales staff guide them through the features that might be most valuable. This kind of ease of use is not something all SaaS solution providers can claim.
Industry Empirical Barrier to Entry
High growth companies often fail over a longer period of time. To put it into context, 4 out of 5 growth companies will slowdown over the next 5 years, and 9 out of 10 would slow over the next 10 years. The reason is that high growth attracts competition, and hence, returns normalize over time. My projections indicate that Sprout Social will at least, maintain its growth for the next 5 years and more. I better have some proof or reasoning for this.
It’s interesting that, despite the massive under-penetration and significant total addressable market (TAM) opportunity in this space, we do not see many competitors beyond a few additional private players and Sprinklr. Management notes that there has been only one new entrant in the past seven years. There are 2 logical arguments from this – 1: Sector is not attractive enough to new players. This is definitely untrue because players like Salesforce and Adobe tried entering. The large TAM, proven SaaS business model and under-penetration is definitely attractive from an economics perspective. The second reason is that there is an actual barrier of entry which restricts new competition from entering. From my analysis, the high barriers to entry stem from social media platforms downsizing the number of vendors they are willing to share data with due to privacy and GDPR regulations. This makes it challenging for newcomers to gain similar access levels as the current incumbents—a genuine high barrier to entry.
So, why did Salesforce and Adobe fail when they attempted to enter this space?
Firstly, the technology stack used in their operations is not compatible with social media. For example, Salesforce’s CRM and email marketing systems rely on unique identifiers like email addresses or phone numbers, resulting in static data that is relatively easy to manage. In contrast, social media data for the same individual can differ significantly across platforms like LinkedIn, Facebook, Twitter, and Pinterest. This disparity means that companies like Salesforce need to develop ways to ingest all this new data from various APIs from the ground up, without benefiting from economies of scale based on the systems they have already built.
Another challenge is the rate and unpredictability of API changes. An expert mentioned that companies like Meta and X often provide less than 10 days’ notice for API updates, making it difficult for companies like Salesforce to allocate sufficient resources and time to manage such a small aspect of their overall business. Further complicating matters is the constant introduction of new platforms and the need to keep up with competitor’s pace of innovation. More on this later on Pushbacks.
What happened to Stock Price?
Sprout Social was previously traded at 40x EV/Sales back in 2021 but was sold off alongside other high-multiple software companies. The stock remained flat for the next two years until Q1 of 2024, when it crashed another 46%. Why did this happen?
Firstly, the company missed its sales target by 1% and subsequently reduced its revenue growth guidance by 5%. Then, the company announced the surprise departure of CEO and Founder Justyn, along with the appointment of Ryan Barretto as his replacement. While this might have been shocking to investors, insiders at Sprout Social indicated they were not at all surprised by this move and had been anticipating the announcement.
As a side note, a similar culture of smooth transition from founder to new executives was evident in December 2023, when then-CTO and Co-Founder Aaron Rankin stepped down to focus on supporting the team, while Alan Boyce, the first platform engineer he hired, was promoted to the next CTO.
The kicker for investors was the sudden removal of key metrics like ARR and customer count especially in a quarter they missed where they missed expectations. This likely created investor anxiety, leading to a kind of lollapalooza effect as investors rushed to sell the stock. But if you think about it, this move made a lot of sense.
Firstly, Sprout Social’s revenue mix has shifted from 70% month-to-month and 30% annual and multi-year contracts to 30% month-to-month and 70% annual and multi-year contracts. This shift is largely due to the increasing focus on enterprise customers. ARR can inflate revenues if customers pay upfront, but it doesn’t account for churn. RPOs, on the other hand, provide a much clearer view of revenue stability. It is not perfect – Sprout social still has 30% month-to-month, but we expect that to decrease moving forward.
Secondly, the promotion of Ryan Barretto to CEO, despite the timing, seems to be a strong choice. Given the significant opportunity for Sprout Social to capitalize on untapped Salesforce Service Cloud customers, execution would be key. Ryan's 10+ years of experience at Salesforce will be a considerable asset.
Lastly, regarding revenue guidance, I found it amusing when management explained that they reduced guidance to set more conservative targets so that "we can beat it later." Not much else needs to be said about that.
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.
*请注意，所有这些仅供参考，不应被视为投资建议。如果您选择投资任何股票，您需要自行承担风险。
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