Updates for Sprout Social and Clear Secure

Starting with this update, I'm going to take a slightly different tact to quarterly updates, since the posts were clogging the blog feed. Instead of writing up every single followed stock every quarter, which isn't sustainable, I'm only going to touch on ones where I felt there was some meaningful news, or where a stock's value is starting to diverge from the fundamentals (in either direction).

This should allow us to be more succinct and impactful in quarterly update posts. The simple fact is that most of our followed stocks are stable and predictable firms that deliver good results quarter after quarter with little to comment on. For these, I will continue updating the fair value price on an ongoing basis, but they may not have commentary until and unless something unusual takes place.

In that vein, let's cover 2 notable quarters that were recently reported - those for Sprout Social and Clear Secure.

Sprout Social (SPT)

Without question, the most meaningful action has occurred in Sprout Social, a Watch List stock for some time. The stock price has plummeted from near $60 down to the mid-$20's. That begs the obvious question - is it a buy now?

The biggest news around Sprout is that CEO and co-founder Justyn Howard is stepping down in October. He will remain as executive chairman, but will be succeeded by company President Ryan Barretto. Barretto has been with the firm since 2016, when it was in its embryonic stage, and has held various senior level positions, so he seems like a solid choice to take over as CEO. I'm not too concerned here, although it does remove founder-based leadership to some degree.

Compounding this was a substantial cut in fiscal '24 revenue guidance from a previous $425 million number to $405-406 million. This was explained on the call as a side effect of the company's modified strategy to focus on the enterprise cohort - firms that do over $50k in revenue a year. As a result, there is some inefficiency in the sales process right now, and a bleeding off of smaller customers.

I'm okay with some revenue weakness that comes with transitioning to a more attractive strategy. Enterprise clients are less likely to switch vendors and more likely to grow their internal usage of the tool (leading to sales growth at lower marketing expense). Sprout grew customers over $50k by 44% this quarter. The strategy is working but the transition may be a little bumpy.

On the other hand, Sprout is still going through growing pains to transition to a solidly cash positive operation. We've discounted for this and, clearly, need to modify revenue expectations. Still, I think the stock is reasonably worth $33 a share. It currently trades about 15% under that price - a good entry point but not *quite* good enough. It stays on the Watch List until we get a better buy-in price, at which point it will be time to jump into this social media aggregation leader.

Clear Secure (YOU)

If there is one stock where the apparent financial value has FAR diverged from current market valuation, it's Clear Secure. This mostly airport-based identity platform delivered another good quarter, with sales up 35%, active users up 19%, and free cash flow margin rising to 43%. The firm continued to roll out improvements to the CLEAR Plus airport experience, TSA PreCheck sales through CLEAR finally started this past quarter, and CLEAR Verified continues to be extended to support things like checking in for doctor's appointments, or verifying identity for large in-store purchases.

So, with a fair value price over $40, but a stock trading below $17, how to explain this very wide gap?

I feel the market doesn't have a high opinion of the business model. A lot of people still don't see the difference between CLEAR and TSA PreCheck, even though they apply to different parts of the security line. At the same time, there is not a lot of apparent uptake for the platform outside of airports. The "optionality" inherent in a general use identity platform doesn't seem to be materializing - yet.

Still, it is hard to ignore the firm's continued strong growth and highly cash profitable operating results. I continue to see good opportunities for the platform outside of airports, particularly in financial services and other business-focused use cases. And the moat for the airport business is undeniable - there is no room for a competitor. The TSA PreCheck deal could grow into something quite meaningful. And CLEAR has been able to push through some substantial price increases with only modest drops in net retention.

Even if current growth trends moderate going forward (and they will), YOU stock continues to trade far below intrinsic value. I'm pushing the fair value price up to $46. From current prices, it would need to almost triple just to be fairly valued!