Further weakness as Sprout Social (NASDAQ:SPT) drops 10% this week, taking three-year losses to 71%

As every investor would know, not every swing hits the sweet spot. But you want to avoid the really big losses like the plague. So consider, for a moment, the misfortune of Sprout Social, Inc. (NASDAQ:SPT) investors who have held the stock for three years as it declined a whopping 71%. That would certainly shake our confidence in the decision to own the stock. The more recent news is of little comfort, with the share price down 54% in a year. The falls have accelerated recently, with the share price down 20% in the last three months.

Since Sprout Social has shed US$112m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

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Sprout Social isn't currently profitable, so most analysts would look to revenue growth to get an idea of how fast the underlying business is growing. When a company doesn't make profits, we'd generally hope to see good revenue growth. As you can imagine, fast revenue growth, when maintained, often leads to fast profit growth.

Over three years, Sprout Social grew revenue at 24% per year. That is faster than most pre-profit companies. So why has the share priced crashed 19% per year, in the same time? You'd want to take a close look at the balance sheet, as well as the losses. Ultimately, revenue growth doesn't amount to much if the business can't scale well. If the company is low on cash, it may have to raise capital soon.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

Sprout Social is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. If you are thinking of buying or selling Sprout Social stock, you should check out this free report showing analyst consensus estimates for future profits.

A Different Perspective

Sprout Social shareholders are down 54% for the year, but the market itself is up 18%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 7% over the last half decade. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example - Sprout Social has 1 warning sign we think you should be aware of.

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Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.

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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.