The Sprout Social, Inc. (NASDAQ:SPT) share price has fared very poorly over the last month, falling by a substantial 34%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 31% share price drop.
Even after such a large drop in price, Sprout Social may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of -42.1x, since almost half of all companies in the United States have P/E ratios greater than 15x and even P/E's higher than 29x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Sprout Social hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Keen to find out how analysts think Sprout Social's future stacks up against the industry? In that case, our free report is a great place to start.
How Is Sprout Social's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as depressed as Sprout Social's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 56%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 1.8% per year during the coming three years according to the eleven analysts following the company. That's not great when the rest of the market is expected to grow by 11% each year.
With this information, we are not surprised that Sprout Social is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Key Takeaway
Sprout Social's P/E looks about as weak as its stock price lately. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Sprout Social maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Having said that, be aware Sprout Social is showing 2 warning signs in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on Sprout Social, explore our interactive list of high quality stocks to get an idea of what else is out there.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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