#SocialStocks: TikTok seeks to overturn ban in federal lawsuit

Trump Media auditor charged with fraud, Reddit provides first earnings release as public company 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.

FIGHTING BACK: 

After President Biden recently signed a bill that will force TikTok’s Chinese owner, ByteDance, to sell the social media app or face a ban in the United States, TikTok said it filed a petition in federal court seeking to overturn the “unconstitutional” ban. In the 67-page petition it provided, which initiates the lawsuit, TikTok said in part: “There is no question: The act will force a shutdown of TikTok by Jan. 19, 2025.”

Reddit (RDDT) announced that Sarah Farrell, co-founder and Managing Partner of Waygrove Partnership, has joined Reddit’s Board of Directors. Sarah has served as a board observer since 2021 and will fill a new seat, increasing its Board to eight directors. “Sarah’s expertise in finance and investing has been invaluable as we’ve made the transition to a public company,” said Steve Huffman, Co-Founder and CEO of Reddit. “This appointment is a testament to Sarah’s contributions, and I look forward to her continued impact on Reddit’s mission.”

AUDITOR AUDIBLE: 

Trump Media (DJT) announced the appointment of Semple, Marchal & Cooper, LLP as its independent registered public accounting firm, effective May 4, 2024. TMTG said the appointment was made after a detailed evaluation process and that it anticipates seeking a limited extension of the deadline for its upcoming 10-Q by filing a Form 12b-25 no later than one business day after the original due date for such report. The Fly notes that the SEC on Friday banned BF Borgers, the firm that had previously been registered as the auditor for TMTG. This came after the Securities and Exchange Commission charged audit firm BF Borgers CPA PC and its owner, Benjamin F. Borgers, with deliberate and systemic failures to comply with Public Company Accounting Oversight Board, or PCAOB, standards in its audits and reviews incorporated in more than 1,500 SEC filings from January 2021 through June 2023. The SEC also charged the respondents with falsely representing to their clients that the firm’s work would comply with PCAOB standards; fabricating audit documentation to make it appear that the firm’s work did comply with PCAOB standards; and falsely stating in audit reports included in more than 500 public company SEC filings that the firm’s audits complied with PCAOB standards. To settle the SEC’s charges, BF Borgers agreed to pay a $12M civil penalty, and Benjamin Borgers agreed to pay a $2M civil penalty. Both respondents also agreed to permanent suspensions from appearing and practicing before the Commission as accountants, effective immediately. Borgers was the auditing firm for Trump Media and the share price was down 6% in early trading on Friday.

EARNINGS RECAP: 

In its first quarter as a public company, Reddit reported Q1 EPS and revenue that beat analyst expectations. Daily active uniques increased 37% year-over-year to 82.7M. Weekly active uniques increased 40% year-over-year to 306.2 million. “It was a strong start to the year and a milestone quarter for Reddit and our communities as we debuted as a public company,” said Steve Huffman, Co-Founder and CEO of Reddit. “We see this as the beginning of a new chapter as we work towards building the next generation of Reddit.” Additionally, the company’s second quarter revenue guidance came in ahead of consensus. Goldman Sachs increased the firm’s price target on Reddit. The firm updated its forecasts for the company’s inaugural public company earnings report and management’s updated forward commentary. The firm expects the broader digital advertising landscape health, Reddit’s idiosyncratic execution of daily active uniques and sustaining momentum around advertiser count growth and advertiser budget as likely to be “the key driver of investor debates and any stock price volatility” in the coming quarters, the analyst told investors.

Shares of Sprout Social (SPT) plummeted over 20% following its Q1 earnings miss last week. “As partners in this company’s success to date and strategic direction moving forward, Ryan and I had an opportunity to re-draw our roles to best position us to accelerate beyond our $1B target.” said Justyn Howard, Sprout Social’s CEO and co-founder. “We’ve always embraced change as a catalyst for growth. As a founder, shareholder, board member and soon to be Executive Chairman, I am thrilled to be succeeded by one of the most exceptional leaders I’ve ever worked with.” Despite the muted Q1 results, the company offered Q2 guidance that outpaced analyst estimates. “We believe our business has fundamentally changed for the better over the past 18 months and we nicely overperformed our gross retention and margin plans during Q1,” said Joe Del Preto, CFO. “We underestimated the magnitude of enterprise seasonality that now comes with our business mix, while also self-inducing sales execution headwinds during Q1 that we believe were important to position us for future success. We have factored Q1 underperformance and tightened strategic focus into our reduced 2024 revenue forecast, though we believe we’re now positioned for greater long- term success.” BTIG downgraded Sprout Social post the Q1 report. The company reported disappointing results and provided significantly lower guidance as it makes major changes to its go-to-market strategy, which will take several quarters to generate upside in the model, the analyst noted. The firm said that while Sprout was still able to deliver decent revenue performance obligation growth by adding new larger customers, the overall business underperformed as the move up-market to focus on enterprise customers takes on a distinctly back-end weighted seasonality that took the company off guard. BTIG does not expect to see a meaningful improvement in reported results until later in the year.

ADDITIONAL ANALYST COMMENTARY: 

Loop Capital raised its price target on Reddit. The company’s first reported quarter as a public company was exceptional, beating on all metrics, the analyst told investors in a research note. Despite being an 18-year-old company, Reddit did not start its monetization efforts until a few years ago, and there is still significant low-hanging fruit, the firm added.

Raymond James also elevated its price target on Reddit. Reddit posted a high-quality inaugural public quarter beat and raise, topping buyside expectations with key metric U.S. DAUq of 41.5M well ahead of expectations, the analyst tells investors in a research note. The firm walked away more convicted in its constructive structural DAUq growth debate stance and views the management tone as confident with respect to ultimately aligning on more licensing partnerships.

Loop Capital heightened the firm’s price target on Pinterest (PINS) after its Q1 earnings beat last week. The bull case for the stock has been progressing for some time and now appears to have hit an inflection, with the company benefiting across each of its four key growth drivers – users and engagement, ad load, lower-funnel capabilities, and enhancing demand with third-party partners, the analyst said.

Goldman Sachs downgraded Sprout Social. The firm had underestimated the near-term disruption risk to organic growth from the company’s re-orientation upmarket, adding that it had anticipated the move “would be a more immediate driver of incremental growth for the business. While the firm continues to be positive on Sprout’s ability to grow durably and take share upmarket longer-term, particularly given the company’s growing relationship with Salesforce (CRM) and challenges faced by competitors, Goldman believes there is added risk given the lack of visibility into pipeline conversion.

Additionally, Piper Sandler bumped Sprout. The company’s Q1 “was not the snapback” bulls had hoped for, but instead a continuation of “concerning” annual recurring revenue trends with less obvious cause given the “zeroing” out of the low-end by the end of last year, the analyst told investors in a research note. The firm said it is hard to imagine a near-term revival in investor sentiment with ARR and total customer metrics going away as well as a back-end loaded year ahead.

Also, Baird downgraded Sprout. The company reported mixed results with the big surprise coming from 2024 revenue guidance being lowered amid execution challenges, the analyst noted. The firm said the earnings call was a “perfect storm” of lowered guidance, pulled metrics, and a choppy growth narrative. Sprout’s sales changes portend further uncertainty, adds Baird.

Exane BNP Paribas initiated coverage of Meta Platforms (META). The company’s artificial intelligence spending is set to spike without new revenue streams to match, the analyst told investors. The firm prefers Meta’s generative AI peers that it believes have a clearer path to monetization.

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Originally Posted May 8, 2024 – #SocialStocks: TikTok seeks to overturn ban in federal lawsuit