Sprout Social Is Expanding With Tagger Acquisition

Watch List stock Sprout Social (SPT) last week reported its second quarter results. There were a few notable things about the quarter I wanted to share with readers.

First, the results themselves were pretty strong. Revenue came in at +29%, just a bit below my 30% target. Annual recurring revenue (ARR e.g. subscriptions) grew 27%. We continue to see the company's strategy of targeting larger, stickier enterprise firms. While total customer count fell 1%, ARR from customers generating over $2,000 in annual revenue grew 33%, and the big fish, clients with ARR over $50,000, grew 48%. This strategy makes a lot of sense, as Sprout is going to have an easier time growing organically with large clients, and large firms - while harder to win new business with - are less likely to switch vendors and certainly less likely to go out of business.

The bigger news in the quarter was Sprout's acquisition of Tagger Media for $140 million in cash. Tagger Media provides SaaS-based tools that allow marketers to plan and measure the impact of influencer-based marketing campaigns. Think McDonald's and Travis Scott, or Taco Bell and Pete Davidson, or Dunkin' and Charli D'Amelio on TikTok. Tagger is the leading platform in this space, winning back to back "Best Influencer Marketing Platform" from the Global Influencer Marketing Awards.

Readers know I am always wary of acquisitions, but if they make sense and are not unreasonably large compared to the size of the buyer, they can be value accretive. I think that's what we have here. Adding influencer marketing tools to a platform meant to manage social media presence just makes sense, as that is where influencers "live". At $140 million, it is a large acquisition but not a debilitating one. Sprout has $190 million in cash and no debt on its balance sheet, so even after the deal closes we are still looking at a firm on very solid financial footing.

It will be interesting to see how Tagger allows Sprout to expand its offerings going forward. For now, I'm not seeing any reason to budge on the previous $33 fair value target. The stock is still way too pricey (even after a pretty healthy decline recently), but we will keep it "on watch".