#SocialStocks: Sprout Dips Following Short Report

TikTok fined by UK’s Information Commissioner’s Office, Meta considers political ad ban in Europe, and other notable stories from this week

Welcome to “#SocialStocks,” The Fly’s weekly recap of Wall Street’s reactions to social media stock news.

SPROUT SHORT: 

Shares of Sprout Social (SPT) are under pressure after Akram’s Razor published a short report on the company, saying it sees 40%-60% downside over the next 6 months. The Razor’s Edge report said Sprout Social is “one of the best short setups” it has come across in a while. “Despite a very transparent slowdown in the business’s organic customer growth, shares have drastically outperformed SaaS peers throughout the worst market for Software stocks in 20 years and now sell at a huge premium to the space. This thesis combines a nosebleed valuation outlier with a variant perception supported by data and customer calls, describing a company expected to grow in the 30s endlessly, but which is actually about to collide headlong into a near-term growth wall – the set-up is fabulous,” the report claimed. “Consensus believes Sprout is going to grow 30% this year and again next year. I believe Sprout’s growth will stall in the latter part of this year and may be a single-digit grower in 2024, possibly far worse if Sprinklr’s recent strategic pivot is a big success.” Overall, The Razor’s Edge states that, “The short offers 40%-60% downside over the next six months and is in my opinion the best risk/reward short in the entire SaaS sector.” Shares of Sprout Social dropped almost 12% this morning.

OVERSIGHT BOARD CHAIR: 

Meta (META) provided an update on its Oversight Board membership: “We are announcing that 17 Board Members appointed in 2020, including our three Co-Chairs, have been renewed for a second term, which began on April 1, 2023. Other Members who joined the Board later will be eligible for renewal at the end of their first terms. With the completion of Board Members’ first terms, Meta is withdrawing from the selection process. Once the ongoing processes for selecting two new Board Members are complete, the Oversight Board will be solely responsible for the selection of all future Board Members…. The departure of Jamal Greene in January 2023 left a vacant post among the Oversight Board Co-Chairs. Today, we are announcing that current Board Member Evelyn Aswad has been appointed to serve as a Co-Chair. Evelyn was appointed by our existing Co-Chairs Catalina Botero-Marino, Michael McConnell, and Helle Thorning-Schmidt, with support from Board Members. Meta was not involved in Evelyn’s appointment.” Meta also announced that original Board member Maina Kiai has decided to step down from the board to focus on other projects.

FINED: 

The ICO, UK’s independent body set up to uphold information rights, said in an earlier statement: “The Information Commissioner’s Office, ICO, has issued a GBP 12,700,000 fine to TikTok Information Technologies UK Limited and TikTok for a number of breaches of data protection law, including failing to use children’s personal data lawfully. The ICO estimates that TikTok allowed up to 1.4M UK children under 13 to use its platform in 2020, despite its own rules not allowing children that age to create an account. UK data protection law says that organisations that use personal data when offering information society services to children under 13 must have consent from their parents or carers.TikTok failed to do that, even though it ought to have been aware that under 13s were using its platform. TikTok also failed to carry out adequate checks to identify and remove underage children from its platform. The ICO investigation found that a concern was raised internally with some senior employees about children under 13 using the platform and not being removed. In the ICO’s view TikTok did not respond adequately. John Edwards…”There are laws in place to make sure our children are as safe in the digital world as they are in the physical world. TikTok did not abide by those laws.”

TWITTER BOOST: 

The price of Dogecoin rose over 20% to around $0.092 on Monday, which coincided with the token’s Shiba Inu logo having replaced Twitter’s (TWTR) typical bird logo on the social media app’s website.

ADS ABROAD: 

Meta is considering a company-wide political ads ban in Europe, concerned its platforms will be unable to comply with forthcoming online campaign laws, The Financial Times’ Javier Espinoza and Cristina Criddle reported. According to two people briefed on internal discussions, Meta is concerned that the definition of political ads under the plan “will be so broad that it will be easier to refuse all paid-for political campaigns on the company’s sites.”

ANALYST COMMENTARY: 

Argus upgraded Meta Platforms. The company’s deep cost cuts should boost its profitability even in an uncertain macro uncertainty, the slowdown in digital advertising, and the impact of Apple’s (AAPL) ad tracking policy, the analyst told investors in a research note. The firm added that two of Meta’s competitors are currently experiencing problems that could slow their growth: TikTok faces a potential ban in the U.S., or at least the sustained hostility of the U.S. government and Twitter may not have been a major threat to Meta. Argus is also raising its 2023 GAAP EPS view.

Jefferies analyst Brent Thill raised the firm’s price target on Meta Platforms. The combination of artificial intelligence investments leading to higher engagement and easier compares should drive accelerating revenue growth in the second half of 2023, the analyst tells investors in a research note. Further, Meta’s expense cuts and share buybacks could drive earnings upside, adds the firm. Jefferies sees upside in the company’s “underappreciated” click-to-messaging business.

RBC Capital analyst Brad Erickson raised the firm’s price target on Pinterest (PINS). A meaningful media network partnership could be coming for the company, based on the recent management commentary, with Google (GOOG, GOOGL) being a potential partner, the analyst tells investors in a research note. The partnership could be worth double-digit upside in the stock, RBC added, though it also cites its ad load analysis that suggests Pinterest is potentially more “well-baked” than investors may appreciate.

Credit Suisse analyst Stephen Ju raised the firm’s price target on Meta Platforms. With two rounds of cost cuts already announced, the investment rationale now hinges on revenue growth outperformance, the firm says. Credit Suisse notes that Meta has essentially replaced the post ATT $10B in lost revenue with Click-to-Message, and believes there is significant room for Meta to ramp revenue for both Messenger/WhatsApp. To this backdrop the firm adds search revenue, with the most meaningful recent update being Instagram’s announcement that it will start to show ads within search results, which Credit Suisse believes should add a new stream of high-margin revenue – potentially reaching close to $1B over the next several years.

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Originally Posted April 5, 2023 – #SocialStocks: Sprout dips following short report