Sprout Social, Inc.'s (NASDAQ:SPT) Shares Lagging The Industry But So Is The Business

With a price-to-sales (or "P/S") ratio of 1.5x Sprout Social, Inc. (NASDAQ:SPT) may be sending very bullish signals at the moment, given that almost half of all the Software companies in the United States have P/S ratios greater than 5x and even P/S higher than 11x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

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View our latest analysis for Sprout Social

How Sprout Social Has Been Performing

Recent times haven't been great for Sprout Social as its revenue has been rising slower than most other companies. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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 Revenue Growth Trending?

Sprout Social's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 13% last year. The latest three year period has also seen an excellent 87% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 12% per year over the next three years. With the industry predicted to deliver 31% growth per annum, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Sprout Social's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Sprout Social's P/S?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Sprout Social maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Sprout Social that you should be aware of.

If you're unsure about the strength of Sprout Social's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.