Yet Another Value Podcast - Can Sprout Social Survive the SaaSpocalypse with Pernas Research's Deiya Pernas $SPT

Episode Date: April 30, 2026

In this episode of Yet Another Value Podcast, host Andrew Walker speaks with Deiya Pernas of Pernas Research about Sprout Social (SPT) and the broader SaaS selloff. They examine the company’s platform, competitive positioning, and whether the market is mispricing its long-term potential. The discussion covers API complexity, integrations, AI risks, and shifting perceptions across SaaS. They also address valuation, stock-based compensation concerns, and possible catalysts including governance changes or acquisition interest. The conversation closes with a wider look at the so-called SaaS apocalypse and where opportunities may exist.____________________________________________________________[00:00:00] Introduction and guest overview[00:03:59] Sprout Social business model explained[00:05:38] Market mispricing and SaaS selloff[00:09:53] Fundamentals versus market perception debate[00:12:05] SaaS valuation reset discussion[00:13:45] Platform capabilities and customer usage[00:15:16] API complexity and competitive advantage[00:18:58] Compliance risks and AI concerns[00:21:48] Platform competition from social networks[00:23:50] AI disruption and company adaptation[00:27:07] Systems of record skepticism discussed[00:30:00] Integrations and switching costs impact[00:31:01] Stock-based compensation concerns raised[00:32:01] Dilution risks and sustainability issues[00:33:48] Governance changes as potential catalyst[00:35:49] Management turnover and uncertainty[00:36:46] Acquisition potential discussed[00:38:59] Broader SaaS opportunities and risks[00:42:11] SaaS durability versus AI disruption[00:45:36] Lack of insider buying observations[00:46:55] Criticism of board incentivesLinks:Yet Another Value Blog - https://www.yetanothervalueblog.com See our legal disclaimer here: https://www.yetanothervalueblog.com/p/legal-and-disclaimerProduction and editing by The Podcast Consultant - https://thepodcastconsultant.com/

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Today's episode, I've got a good one for you. It is Dea Pernas from Pernas Research. We are going to talk about Sprout Social. The ticker there is SPT. Obviously, nothing's investment advice. See the disclaimer at the end of the podcast and in the show notes. But, you know, this is a company that has just been brutally, brutally hit by the Saspocalypse. And Dea is going to talk about why he thinks this is overblown.

And we're going to go into, I, you know, I've got a lot of push and pulls. This is a company that came out and had their whole special. call where they talked about, hey, we are a systems of record company. We are, we are going to be an AI beneficiary. They gave guidance in late February. So during the middle of the SaaS apocalypse, where they said, hey, we're growing this year. We're increasing operating leverage, all this sort of stuff. We're not getting impacted by this. And the stock market says, we don't believe you. We don't believe you. We don't believe you stock down 50% this year, 75% over the past 12 months. We're going to have a, so anyway, me and day, I have a really good conversation on this. And then at the tail end,

we talk a little bit about SaaS in general, and I hop off on a soap box and start. start ranting about how borders of directors are overpaid. So we're going to get there in one second. Before I get there, I'll include link to Pernas Research in the show notes. If you're interested, you should definitely check that out. I'll include a link to the Twitter thread we talk about where Daya talks about how the Saskopoclips are blown. You should check that out.

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With me today, I'm excited to have Dea Pernos from Pernos research. Dea, how's it going? Fantastic. Glad being here. I'm really excited for this one. I followed Jell's research for a while. So before we get there, just remind everyone, disclaimer, nothing on this podcast is investing advice. Legal disclaimer in the show notes all the way at the podcast, wherever you want to get it. So you can go there. The company we're going to talk about here is Sprout Social.

I've actually got years and years of notes of them because they were a popular battleground stock, short thesis about 2022, I want to say. So I'm really excited at this, but I'll just, you know, we're talking here. almost the middle of 2006. I'll turn it over to you. What is Sprout social, and why are they so interesting? Yeah, so around those times, those short reports are coming out,

I think they were well warranted, just basically on valuation alone. The company was knocking on the door to be a large cap, about $6, $7 billion, and then it's gone down more than 90% since. It's now it's knocking on the door to be a microcap.

So what the company does, it's really an operating platform for all an enterprise's social media needs across social listening. So kind of what are consumers out there thinking, do we need to adjust our product strategy, so on and so forth, to social care. A lot of customer support is moving into the social realm. Not only do customers want their inquiries or complaints answered in social sphere, but it just, it's almost like a PR need

at this point. It just makes you look good if you're out there answering questions, handling issues and problems and so on. And then there's obviously the where Sprout started, or Sprout started, which is scheduling and publishing. So, you know, a lot of companies, they have, you know, dozens accounts across a handful of social media networks, and they need to be able to engage with customers in a central kind of way. So that's really what the services and the products the company provide. This is what the SaaS platform provides.

And, yeah, this type of spend by companies is becoming more and more important. So it's moving from a nice to have to a need to have. So that's part of the thesis. Perfect. I've got lots to talk about, but let me start with the question I always like to serve out. The market's a really competitive place. What do you think you're seeing that the market is missing that makes throughout kind of a alpha-adjusted risk reward here?

So I think the market is certainly competitive, but there are certain times when the market can not be very discerning at all. And I think we're starting to see some of that in the SaaSpocalypse sell-off, especially with the smaller names. Like, if you try to explain the diversion and returns between a lot of the application SaaS players, it tends to be driven by a single factor, which is size. And the market is assuming, and it's somewhat intuitive, that the smaller companies are more like a SaaS tool.

They'll be easily replaced. They don't really have any sort of advantages there. Cumbents, maybe there's a lot more complexity, a lot more relationships. It's just harder to kind of displace. So what I think the market is missing is that. Number one, this spend is moving from a nice to have to a need to have by companies. Sprout has more built-in advantages than the market understands. Then the market seems stinking.

We'll get into that and we'll get into why. And, yeah, as a result of this sort of scare, it's just gotten sold off entirely. So, you know, the market is underestimating the company's ability to adjust in an AI world. and their built-in advantages. So all those things put together, you know, for us, make the company, the valuation right now, which is 0.6.7 times EV sales to us makes no sense. Cool. So I haven't told that in a second, but let me just for Sess.

I mean, I did a podcast with Marcel Lema, which I thought was really great. I know you put out a Twitter thread, which I can include in the show notes. And by the way, I'll include a link to Pernos research in the show notes as well for people who want to go check it out. But you put out a Twitter thread that said, hey, the SaaSpocalypse Fures, are ever blown. Neither of you are alone, right? These things are going to have some, I like to say they don't have any term involved, but they will. Like the contracts don't run out. They generate lots of cash flow. But I just want to start with this question. Is your interest in Sprout, you know, is it Saspocalypse driven or is it Sprout specific? Is it, you know, and I think there's

some combination of both, but is it more about, hey, I think the Saspoclus is overblown, so I want to buy Sprout, or is it Sprout in particular looks interesting to me. Yeah, well, those things are related. It's, you know, part of our interest as people who actively look at companies is trying to assess whether their valuation is correct. So, and perception has a lot to do with that. And perception drives, you know, flows and whether something's getting bought a lot or sold. So it's really about the valuation. And for us, it's like we're not out here saying that Sprout is the greatest company of all time.

It's really like, hey, we disagree with the market on the probabilities whether this thing has staying power or not. And because of that, we don't think the valuation makes sense. So the valuation is a sizable part to the story. That's perfect. No, it's, I'll dive into the Sproul specific things in a second, but it's really interesting, right? Like, you've got Sprout, which is down just this year, you know, from January to today, let's just round it up to 50%, right?

And they report earnings. Their earnings in late February. Their earnings are a beat. They guide, they say, hey, they basically guide and say we're going to be within eight quarters. We're going to be a rule of 40 company. And we're going to do that by taking our non-gap, EBIT margins up from wherever they are. I can't remember off the top head. I think they're in the 15% range.

We're going to take it up to 30% and we're going to keep a double-digit growth rate, right? They guide debt. They guide their 2026 growth. This is at the end of February. So the SaaSpocalypse is well underway. They guide to, I believe it's about 10% growth on the year, right? Like, they're guiding to all this thing. And the interesting thing is this stock is hammered.

It's down 75% in the past year. It's down 50% year to date. And all this hammering is happening as the company is saying, hey, our internal metrics are fine, right? And they're telling you we're an AI, maybe not winner, but we're going to be an AI beneficiary. They're telling you that their outlook is good. They're earning their operating leverage is going to explode. It's just the SaaS Falka bit. I'll dive into the other sides of it.

But it's just really interesting that you've got these companies imploding as they're selling you. it's not hitting our numbers yet. It's still not in our numbers yet. Actually, things are pretty good. And that's kind of where the argument is. It's like the million dollar question. Is perception getting way ahead of itself? Or are the fundamentals for these companies

going to continue to improve? And just as a result of these improving fundamentals, will that be enough to disprove this perception? And the fundamentals will always disprove the perception. It's only a matter of time. So if you can have conviction, these companies are going to continue to grow, revenue, you're going to see economy as scale, then this perception will go away.

My whole thing is that the market, I think a lot of the sell-off that happened this year was a result of overly price levels for SaaS to start to begin the year anyway. And if you remember, there was a first leg down really where, you know, anthropic, this kind of production-ready marginal cost zero code started to proliferate. And that's where you kind of got the first leg down. and we looked at everything, and we have an application SaaS index that we track, which is like now, you know, Adobe, Salesforce, so and so forth. And it seemed that there weren't really that many bargains. And then February, March, the second leg happened, which is really the agentic fears.

And then we started to see, oh, okay, look, there's some, you know, median EV to sales isn't screaming enterprise cheap. But clearly, if you look at some pockets, there's definitely some value out here. So that's the way we see it. Look, I'm with you. This is one of the tough things for me with this. I mean, there's a lot of tough things. But one of the tough things has been for a lot of these companies, the stocks are down 90%. And, you know, Sprout is actually, they are cheaper, but we will have the conversation on stock comp.

But for a lot of these companies, they're down 90%. And I look at them and say, hey, if I treat stock comp as a real expense, they're still trading at like 75 times EV to EBDA, a thousand times EVDA, whatever it is. And even if I don't, for many of them, they're still like 30 times EVD EBDA. I'm like, look, the stock should have a lot. but they were just priced really, really expensively. Like, they were priced like forever annuities where they were going to grow seats 2% per year. They were going to take price by 3% per year.

Margins were going to expand forever. And they were never going to have any risk. And it's like, yeah, when that goes away, the stocks go pretty sideways. I'll pause there. And then I'm going to dive into Sprout specific thing. But if you've got anything else on just overall evaluation, happy to chat there. Exactly. The market's price these things as kind of, you know, growing annuities and the valuations that like, you know,

company that we think is a good product with the SaaS product, which is Figma, is trading something like 20 times revenue at the beginning of the year. I mean, how does that make any sense? It does it. So, you know, a huge, you know, re-rating down to the much lower levels makes sense. And it, but again, there's a case-by-case thing and some of the smaller SaaS we've gotten sold off a lot more aggressively. So you got to have to look at things on an individual faces.

But, yeah, broadly, that's the typical market. When there are no fears out there, the market tends to overpriced. price things, especially, you know, the SaaS example is a perfect, it's a perfect case study into that. So let's go back to Sprout specific. And just to conceptualize furters, I just want to make sure, again, I've read the earnings calls, I read the emergency, we are a system of rescue podcast. I've looked at the website, but just to make sure, the main Sprout product is, hey, you are, who's a customer they just won? I think they said Philip 66 was a customer they just won. You are Philip 66. You want to manage all of your social at one.

right? So we plug in, you know, we go into their API and we plug in and you can manage your Instagram, your Facebook, your TikTok, your I'm getting pretty old so I don't have many of these social ads, your Snapchat, your Twitter. We can manage them all at once through this thing. And we kind of can give you, you know, in my mind, it's like the real time graph where it says, oh my God, you know, all of a sudden we've got a lot of negative things. Do we need to look and see if something bad has happened? But I'm sure there's a lot more to it than that. But they give you the real time overview of all your social. Is that kind of a fairer? way of thinking about it or is there anything I'm missing? Yes, there's that. Also, more than that, it's a central place to manage your engagement with customers across all these accounts and across all these platforms. And as you know, engagement is absolutely critical. You need to be out there talking to your customers. And again, I think this is a necessity.

Companies can't afford to just stick their head in sand not do this. On top of that, there's also social listening that Sprout pays, they don't, for competitive of reasons they don't get in the nuances too much, but they pay, you know, $9 million a year for increased deeper data access to provide, you know, these companies with just all sorts of insights as far as what's trending in the social sphere. So, you put all this together. I think it's a very powerful platform that really helps, you know, a company stay positioned and stay relevant to its customers. Perfect. Okay. Great. Great overview. So I guess my first worry is, like, it doesn't seem like it's that hard, you know? You're managing.

There are seven, it's a handful of social sites that really matter for this thing. And it doesn't seem like it's that hard. And I'm not saying everyone is going to vibe code their own thing to do it. And I believe you even had a thing in your thing where there were people, small businesses who were vibe coding their own thing. And they were just like, F it. Let's give it to Sprout. It's taking too much time.

But it doesn't seem like everyone's going to vibe code. But it's not like it'd be crazy hard. You know, it's say, hey, AI, go monitor my Facebook, Instagram, TikTok. So what would you see to this AI vibe code worry on the Sprout side? So that's part of the thesis, is that it's kind of like I'm from the West Coast, and this is just a random anecdote. And, you know, I've seen a lot of burger chains kind of come and go and out's my favorite burger chain. And it seems like it's pretty simple, you know, like it's just a burger. But it turns out it's actually quite difficult.

And I don't even know anything about what it takes to make a burger, but I know it's difficult because not many people seem to do it well. And those that do, they don't, you know, they don't hang around for much long. So there's something going on in background there that isn't very intuitive. And for Sprout, a lot of it has to do around just the complexity of API access.

There's one of the reasons why this company has more staying power in the market assumes is that they have relationships, privileged relationships with these social media networks. It doesn't mean they get like these amazing data pipes, but, you know, There's hundreds of APIs that are constantly changing and breaking, and they are the first in line to kind of receive updates. They're not rate limited, like maybe some of the newer players, more scope around permissioning.

There's so much that goes into that around that API kind of web that the market is completely missing. Now, this isn't strictly a moat for sprouts. It's really the codery in the space that are the competitors, really the Hoot Suite, the ones that have the reputational value that have been doing this for a long time. the social media networks trust, which is Hootsweet, Sprout, and a company called Cooros, which are, give or take, 100 million are all roughly around the same size. But there's a reason why the API complexity is so central to this, because if you look at the history of API openness, so to speak, in 2018 was a watershed moment with Cambridge Analytica,

where 90 million kind of users across America were getting fed these ads because essentially that data was stolen by some app that was built on top of Facebook. And then now fast forward to the LLM area, everybody's kind of nervous about their data getting trained on. So API restriction tends to be headed in one direction. So if you have that reputational value and have those relationships, there's a lot of value there. And that's one of the things the market is missing. Oh, yes, Angie, there.

Another one that I think is really interesting that I've recently discovered is the terms of service and everything. and I did not realize this. This would be apply more to if you're texting consumers versus if you're kind of working with the Facebook. But I did not realize, you know, if you're texting consumers and the consumer says no or opt out and you keep texting them, you expose yourself to massive, massive financial penalties. I had no idea.

I thought it was just coming. Because I feel like I get texts all the time from people I told stop texting me. But one of the things that they've been saying is, hey, do you really want your AI, which is, you know, a lot of times aggressive. You know, you hear all the stories of AI finding loopholes and things or doing stuff and trying to cover the tracks. You know, do you want your AI that you said, hey, maximize my social revenue or social engagement? Do you want it going into these APIs and maybe breaking terms of service and everything? And then you, you as a business are fine cut off from Facebook and everything. Like, probably not. And I realize I'm a little bit

stretching with the analogy, but I think it's very interesting of, hey, this is something that is so critical. You know, if you are Roan or you are one of these DTC Instagram players, if you trust this to AI and the AI violates the terms of service in any way that is negative for you, you might never be able to advertise on Instagram again, and then your business is a zero. So I think it's really interesting. I'll let you comment on that, but then I will come. That was bullish. I will come back with some bearish points. Yeah, totally. And there's definitely obviously the other side of it to talk about. But yeah, there's all sorts of, you know, legal compliance. Like, and it's not that. easy to just tell your, whatever it is, to tell Cloud Ocode something that plugs into these API keys.

There's a lot more in that where the social media networks actually want to know what you're using the data for. So there's all, I mean, the amount of compliance business verification reviews and audits to go into this stuff are intense. And, you know, building one of your own is just not, it's not really serious argument that people will start building their own with the, you know, given the lay landscape right now, to me, me, it's not a serious argument. The more serious argument is that, you know, agents are going to start to absorb a lot of the interaction layer. You know, these, you know, think of, like, agents that, the company spent a lot of time and effort, you know, investing a lot of dollars and get work, they're going to absorb a lot of the interaction layer. And as a result of that, switching costs are going to go down, which I think is a more serious argument. But again,

I think meaningful touch points will always remain, you know, always, I mean, like the foreseeable future. So, again, I think the product's protected. I think they have same power. And they have enough time to make the right adjustments, which they're making into the, you know, AI and the Genticlair. Let me give one other pushback. I mean, the thing I worry about is, as I started, there are only a handful of social

networks, right? Meta in particular has their own AI apps, their own AI tools, and they're rolling out a lot of AI tools. And I understand that you, most businesses are going to want one, touchpoint that handles all of them. And meta is not going to launch an AI tool that manages Snapchat, right? Snapchat's not going to let them. Meta's not going to want to. But I do worry, like, as all of these huge companies try to ingratiate, try to intertwine themselves more with their customers and AI just gets better and better, you know, what if the meta thing is good

enough? And there are a lot of business who, hey, 90% of our revenue is Instagram. Let's just use the free meta tool versus go and pay for Sprout. or, you know, go to Sprout and say, hey, you're charging us per seat. By the way, that's another thing we'll talk about in a second, but you're charging us per seat. We're just always price competing you against what you're charging us versus if we go to rec with meta, what you're charging versus if we go hire the junior developer and say, hey, you know, your Mondays and Thursdays are going to be spent vibe coding a tool that integrates with meta, Snapchat, Google, and that's how we're going to do it.

So what do you think about kind of the worry of the, I guess what I'm going to do is, social networks themselves kind of releasing tools that are either good enough or maybe better. You know, maybe meta says, hey, we're not giving you this advantage to access to AI. We're going to hold it back for our own tools and force people to come and use our own tools. Yeah, I think that's a legitimate worry where some of the platforms, the solutions will be so good that enterprise will just go direct to their platforms. But there will always be a need for a cross-platform intermediary tool like Sprout. customers want to be everywhere where the conversations are being had about them.

You know, it's a question of tradeoff. Yeah, we can go all in on meta, but, you know, we lose out on, you know, other the other social networks. So I don't think we're headed to a world where one social network is just going to be so much more powerful that all the attention kind of goes there. The other part of it is like social listening. So do you really want to, you know, put all your eggs in the meta basket, so to speak? And what about X? Don't you want to know what people are saying on X about you? I mean, there's so.

You might not want to know. Honestly, you might not want to know. Yeah, but it's clear that maybe some companies will do that, but there will always be a need for that kind of class platform tool. Let me go to a different one. I'll also do it. Again, I've mentioned a few times. In the middle of March, they had a Systems of Record Day is what they called it.

And they basically came out, and what they were trying to do was tell investors, everyone, and, hey, we're not an AI loser. Like, here's how we're protected. They called it a system of record day because they said it was a system record. We'll go into a system of record a second. We've already touched on it. But they had this one great quote

that has stuck out of my head. It said, an LLM, I guess they said, Anne, and it should be A LLM, is like someone who went to school but never worked a day in their life. And I love that, right? Because you've got all these examples of LLM's giving just crazy answers and everything.

But also when I saw that, and you know, later in the, later in the day, they talked about how Claude is now their best engineer and their best worker. And I did kind of wonder, hey, if you've got a tech forward, sophisticated company that's out here saying like their biggest competitor, their biggest worry is, you know, basically a college graduate, a college graduate who's never a job. Are they taking it seriously enough? Is there any concern there, I guess, would kind of be where I'm driving to?

I think they need to take every SaaS company needs to take it very seriously. And the good news is, is that by and large they are. not only the complex in general, but Sprout in general, they're taking this seriously. And one of the reasons part of the thesis why we don't think SAS is dying is because that these companies, by and large, have the DNA to change. They've made the ship to cloud to mobile, development platforms are changing all the time. So just the culture and the DNA allows them to, they're just more future forward with a lot of things. And another reason why we think SaaS will navigate the change well is it doesn't necessarily cannibalize their current economics.

If you look at other structural rewrite, like a company we're looking at was Western Union. And one of the reasons why I took Western Union, it was so slow for them to make the ship to mobile, is because the take rates were so high on cash that it's just very difficult for a company to kill off part of the Golden Goose to make the transition of their future. It's just the way... Remitly has been a popular topic of conversation on this podcast, on the blog, and everything. And yeah, they basically, they existed because Western Union faced the classic dilemma. Hey, we've got this great network. We take a bunch of money every time someone uses it.

Do we want to undercut herself with an AI offering that, you know, is a fraction of the take grade? Exactly. And I've seen those interviews with you and Mario. They're great. If anybody's seen them, they should go watch them. But yeah, that's exactly. So the SaaS is not in that current.

situation. They're able to make the adjustments. They're, you know, as far as like, and it could even help their economics in some cases, which for some companies, it will certainly do. Going back to the original question, which is how is Sprout evolving, they've implemented their AI tool trellis, which is kind of an LLM wrapper on a lot of the social listening data, which is quite valuable to be able to query. And they're in the middle of this year, they're going to be releasing, they're going to have some magentic announcements as well. So I think the company's taking the threat very seriously. I think we're going to see some credible evolutions in that arena. So yeah, and that's part of the

thesis. If they were just sticking their head and saying it wasn't a risk, that'd be a problem. So they host their big systems record day, right? And you can correct me if I'm wrong. But a couple months ago, every SaaS company started realizing, oh, my God, like, this is trouble. We need to make people think where a system's record company one way or another. And basically what that means is, hey, the customer's data is stored with us, which makes it a bitch to leave us, which means we've got all this unique data that no one else has that will kind of give us a flywheel for our data. And you can correct me if I'm wrong on any of this. Sprout says, hey, I'm just pulling some quotes from their Systems Record Day. They say, look, we've got 15 years

worth of data on how the world's biggest brands manage social, every public and private message that they've ever done. And they're saying, hey, when the AI revolution comes, why wouldn't our AI win because we've got all this data spilled. And you can tell me if I'll pause there, actually, you can tell me if I'm wrong on any of that of the thinking of systems record overall or systems record when it comes to the Sprout. Yeah, I think a lot of companies, they want to be that source of truth, that central counter-repository. You know, a lot of SaaS companies are just trying to, you know, I mean, I'm not saying they're lying or anything, but they're just trying to say whatever it is that might assuage the market, I'm actually not sure how that

assuages market fears because, yeah, but that's all the customer's data. I mean, in theory, you know, another competitor come along, migrate all that data out of there into another platform. So to me, like maybe they think that's what the market wants to hear, but I don't understand how that assuages things, I guess is what I'm saying. You hit the thing on the head. There's two, to me, it's silly. You know, I understand there's some data that maybe, especially the healthcare data that may be for HIPAA reasons and everything, you can't move.

But, you know, just having all this data, the two silly things to me are, A, AI is the best in the world. I know all the time I've got PDFs that I can't get into Excel. Guess what I do? Chat, JBT, ZPT, put it in there. Like, it can migrate these data really quickly. And even if you thought for some reason Sprout own the data, not the company, or maybe, you know, Sprout having the data on 100 companies that they can kind of blend and combine

give them edge. Like it's just, it doesn't seem that great where, okay, cool, I'm going to run chatchy. I'm going to run a clawed on this in the background for six, six weeks, right? And then in six weeks, that would kind of spin up enough data that I could just divorce. So, yeah, that was a risk case. It sounds like both you and me are kind of maybe not buying it quite as hard as the company is pushing it here. Yeah, I think maybe it's just the theory of let's just say what we need to say in order to

you know, to try to change perception here, like maybe the market, and I guess they have a point where the market was given so little credit for them to have staying power around anything, that maybe that was a point of like, hey, just so you guys know, pretty central to, you know, data records or so on. But again, I don't think it's a very powerful argument as far as staying power goes. Last one they like to talk about is integrations. And we already talked about the API access and integrations where they can plug into Facebook and get kind of the advantage, they plug into the social, whatever. But they also say integrations where, hey, if you're a customer and you're using us, not only have we plugged into your Facebook, but we've also on the other side, you know,

we're plugged into your help network or we're plugged into your internal Slack. Like, we've got all these integrations. And if you're going to rip us out, it's actually going to be much more difficult than you think, think about that. They mentioned if you're an asset manager, like we're plugged into a lot of maybe regulatory sensitive stuff that might, that would be, impossible to vibe code something, you know, you'd really want to be checking that. We're plugged in. If you're an e-commerce company, you know, we're plugged in so your customer complains online, we can go see the order number and everything.

What do you think about the integration stickiness that they argue for? Yeah, I just think the more integrations, the more people rely on, you know, it's part of just a broader workflow, plugs into my CRM. Like all that stuff, I think, adds to the, you know, switching costs of the product if you were to switch out. So the integrations are very important. I think, and again, Sprout has dozens of them, especially, I know they're pretty much married to Salesforce with a lot of, you know, as far as a lot of their customers go. So, yeah, I think, again, that part is going to be difficult to replicate. Is it impossible?

No. But it certainly adds to some of the advantages of the product. Perfect. Okay. Look, I think with it, again, there's a long history here. You mentioned Salesforce. course, we could go back to when Salesforce shuts down their social product and kind of make Sprout their primary preferred offering or whatever.

We could talk, but I think we've hit most of the pertinent stuff to the Bull Bear case with Sprout on the business side so far today. Is there anything that we haven't hit that you think we should be talking about or anything? I think the real fly in the ointment with Sprout and maybe the market discreet something here is really the SVC component, which I think is. That's why I said business side, because my next question. She was going to be the SBC. Yeah.

Okay, totally. I got ahead of you. Yeah. So it sounds like we've hit the business. Yeah. So the SBC and just to give numbers for people, you know, in 20205, they see their non-gap EBIT. Let's just round it to numbers.

50 million in non-gap EBIT, but it includes 80 million of stock comp, right? So that's a huge flip. And then as we said, their stock is down 75% in the past year. So about a 400 million market cap today, 1.6 billion market cap a year ago, you know, 80 million of stock comp is doable when you're 1.6 billion of market cap, it's a decent bit of dilution, but it's doable. When you're 400 million and less, 80 million of stock comp, like, if this holds for a year, shareholders are going to have no upside because they're getting diluted like crazy. So I just want to ask you, I kind of laid out a lot of the thoughts there, but I want to ask

you your thoughts on stock comp here. So I think the stock comp is completely out of control. And there is, it's going to change for a few reasons. And like you said, you know, when you when your market valuation is very, very high, you may not have to dilute that much to get to that level, that whatever is, you know, 80 to 100 million, which has been in that range for last few years. But what you've seen, you know, they granted about 6 million or so shares at RSUs last year,

which was double the amount before because the share prices had come down so much. So it creates this kind of exponential. And now, and that was from an average share price of 16, and now it's $6 a share. So it creates this kind of exponential problem as the share price continues to fall off a roof, which will inevitably happen

if you keep diluting at very aggressive rates. So we do not think the SBC is sustainable. You can't have it as 17% of revenues. And there is super voting rights are expiring, December 17th of this year, which we think will be the catalyst for a restructure and our fundamental change of the company. Either an activist will come on board or the company will restructure before then or

there'll be a sale. Something has to give because this is not sustainable and there is a certain constricted time horizon of this. So that's part of the thesis is that it's almost counter-tuted because it's one of the odd cases where you like to see high SBC because you realize it's just not something needs to change. And given the voting rights, super voting rights expire, like that will be the catalyst for change is how we're thinking about it.

No, it makes total sense. And I did not realize the super voting rights expire. It's actually one of my favorite catalyst where you've got a company that is, I don't even know if they're underperforming because, again, the strange thing here is the stock is certainly underperforming, but the business is doing, you know, if I just gave you the business measure, she'd be like, hey, maybe SBC is high, but this is a business that's, you know, doing well, you know, double-digit growth, they're seeing a lot of operating leverage. But one of my favorite setups is business that's underperforming, where the controlling shares

are going away because all of a sudden, they are open to an activist coming in and lobbying a letter and saying, hey, your stock's down 90% over the past year. Maybe the CEO shouldn't be taking home $7 million per year in stock. Hey, you've got an exact share in a CEO and the stocks down 90%. Maybe you don't need two of them. Maybe we need some fresh blood. Maybe we need a new strategy. So it is one of my favorite, one of my favorite setups there.

Yeah, I agree with all that. I think it opens the door for all those conversations. And again, like, maybe you can have 17% or 20%. It was the SBC was 17% of 2005. The year before that, it was 21, year before that was 20. And maybe you can kind of justify that when you are growing at 30, 40% as a tech company. But when you're growing around 10%, you absolutely can't. And again, it's just an impossibility that this situation is going to continue for a few years.

I think one of the reasons they sold off around Q4 earnings is obviously SaaSpocalypse. And I thought the guys was good. But the CFO, who had been there a long time, retires. And he doesn't retire like, hey, it's February 12th. I'm retiring today. He retires a month out. But he retires. And then in March, they named the CEO, interim CFO, interim CEO.

Now, I'm sure they're looking because he's insurm. But, you know, anytime you've got a CFO, we're tiring while the stock is down a lot, and then they kind of put the CEO in the interim CFO seat, and it raises a lot of eyebrows. So I just want to ask you kind of about that management turnover there. Yeah, we don't have many, many kind of nuggets of insight there. I know that it doesn't particularly look good. It seems like there's a lot of confusion going on in C-suite, which, honestly, there probably is. I'm sure it's a pretty tumultuous time and, you know, perception fears, you know, that's part of this struggle investing in SaaS right now. I think boardrooms

in general, they're pretty anxious. So, yeah, we don't have any sort of, any sort of good information that's why that happened or what was the exact cause. But again, it goes back to the valuation, goes back to what we think the space is going through. And yeah, we still think that there's an opportunity there despite, you know, maybe you don't have the steadiest executive team in the world. Do you think this would be a acquisition candidate? And I'm thinking particularly Salesforce instead of the preferred provider here. But do you think this is an acquisition candidate at some point? Yeah, I absolutely do.

I think while they have control, I think that I would not be surprised if there was takeout. It just, the company's small enough. It can fit into like something like a Salesforce. Maybe a lot of SaaS is thinking right now, well, okay, if we have, you know, multiple value vectors, that makes us a lot harder to displace. I wouldn't be surprised if you started seeing that across SaaS, you know, from other SaaS companies. We owned Semrush. This was about, you know, six months ago.

We bought Semrush. We thought that, you know, there was this narrative that SEO was dying a month and a half later. So Samrush got acquired by Adobe because they had this kind of area that, you know, they were helped. A lot of companies are trying to know not only how am I showing up in. SEO, but how am I showing up now in LLMs? And they built out a solution that the market was completely overlooking. So, again, I wouldn't be surprised if you start seeing larger SaaS companies gobbling up these smaller SaaS players.

You think Adobe's happy with that acquisition right now? I think it's, it'll be such a big company compared to Sunrush. It's not that big a deal. I'm just easy because Adobe is obviously in the center of a lot right now. Yeah. Let's see. Look, I think I've covered Sprout Social. Unless you've got anything else on Sprout Social,

I'd love to just take another five or ten minutes and just talk about what you're seen elsewhere in the Sasspaclos. But we can certainly talk Sprout Social if you think there's anything we've missed. I think that's about everything covered on Sprout Social. Again, you know, a lot of it comes down evaluation. And I, you know, I disagree with the market on the probabilities. I think they have staying power and they're going to be able to make adjustments. And they're going to be fine.

And the market doesn't. You know, so that's, you know, it's quite simple. When the value is so low, you just come on and say, well, not a lot has to go right for it to be a double in 12 months. So, yeah. Especially if they get that stock on. Well, then let's go to the rest of SaaS. And again, I'll include a link. You've been, you've got the Twitter thread I'll include, but you've kind of been saying, hey, for a lot of the reason we talked about in Sprout, the SaaS Poclips is overblown.

What else are you seen in the SaaS world that's kind of floating your boat? I think that, um, at first. I think that we're just trying to think of a better, like put together a better factor model to explain the variation between sell-off and SaaS companies. You know, if you're looking at it just from size, you know, that's not nuanced enough. For us, we like SaaS companies that have kind of a real-world component to them. You know, it's not just a digital kind of situation. You know, like if you look at a company like ProCore, it's a platform that really brings together architects, developers, legal, compliance. so on,

building real estate projects. And it's completely essential. And it's pretty much taken over the industry as far as some of the larger, some of the larger real estate projects. So I think companies like that, especially connected to kind of old industries, are going to be, are going to be defensible.

So again, a lot of those companies that are in that sphere are not trading that cheaply. So maybe we just tend to be more price-sensitive and others. but it's something that just we're thinking about like the real whole component of it and how much does that matter and yeah

like even if you get agents and they're doing all these things it doesn't retain durability so that's kind of what we're thinking but again I want to go back to the original sell-off I think the market is correct

with the first leg of the sell-off I think a lot of sizes are valued I think there needed to be a coming to Jesus moment a lot of the stuff around agentic stuff is a risk. If anybody says that, you know, SaaS companies, they retain the high level of switching costs they did before. Nothing's changed. I think that's wrong. I think the moat has definitely

eroded slightly. But I still think they're going to be around and they're going to be, they're going to have meaningful touchpoints with customers. So that's kind of our thoughts on it. No, it's really interesting. I've used this story several times, but I talk to some customers of smaller SaaS companies. And in October, they were saying, oh, the AI is an accelerant. Like, I'm using more of them. And then in January, some of them were saying, I'm not using them at all. In the past three months, it's switched so much. I'm not, I'm not using that company at all anymore. It's just all AI. But on the other hand, you know, particularly some of the larger, better companies, you talk and like, you'll talk to some of the customer, like, look, I can't

switch off it. And yeah, maybe I could vibe code something, but is it going to be right 100% of time? And I kind of already said it earlier, but it's very easy for, you know, my seat in this shoebox of a closet to saying, oh, we can all switch. But for these people are like, hey, if I switch and one thing goes wrong, it's not just that I missed a sale, but I can have legal liability like 50x what I pay, what I'm paying for these things. Like, it gets pretty crazy and it's tough from the outside to see that type of stuff. And, you know, as all these companies say, Claude is their best programmer now. So costs are probably coming down. You know, we mentioned SBC. One way it comes down is, I used to need a thousand engineers. Maybe now I need 100. And

By the way, my 100 or 100 times more efficient, so it's like I have 10,000. So my product roadmap, sorry, it's just market's a fascinating place, but it is tough, man. Yeah, I think it's, there's a lot of arguments you make on both sides. A lot of the arguments around, well, well, you know, a lot of these entrants, yeah, the incumbents have the same kind of tools that they do. So aren't they going to be able to advance their product in the same rate? So, yeah, I think a lot of those arguments cut both ways and the market was kind of overlooking that.

But it clearly, everything you said to me sums down into it's a lot easier to replicate a SaaS tool. But it's, but building a SaaS company is just as hard or even harder. Now, I mean, funding for SaaS companies or for SaaS startups is completely dried up. You know, trying to get to that level of critical mass, build out customer support, sales from like a new SaaS company, I think is you're going to have a very, very hard time. So there is arguments being made for entrenchment as far as, and I'm talking enterprise SaaS, really. So, yeah, I think it's a fascinating, the landscape's changing. But, you know, again, you have a lot of these income advantages. A lot of these fears around five coding are, I don't think are serious arguments for a lot of the reasons you mentioned.

So, yeah, we, again, a lot easier to build a SaaS tool. And there's some SaaS tools that we've replicated using cloud code. But, you know, we're not going to go out there trying to. to build a SaaS company and sell this stuff. And I'm sure you've had this. Like, I've been doing a lot of, I can't use cloud code because I'm not a programmer. I'm too dumb. But I've been doing a lot of cloud co-work and having to build things.

And they're really cool. But you know, it is really brittle. Like I'll build it. And then one day I'll stop working. And I'll be like, hey, I was like, actually starting to rely on this. How do I work? What do I do to fix it? And like, you forget these things are pretty brittle.

And yes, I can spend a day getting the thing back up and running. But I'm building pretty simple stuff. And it's not like my livelihood is depending on. it makes my job a little easier but you imagine a company with a thousand employees that vibe code something and it goes out it's kind of crazy let me go to something separate we we mentioned stock com you know the one thing i've been a little disappointed by and i've started to see some hits here and there but you have seen you know the adobe the sales force like big share repurchase plans right but i haven't really seen it's sprout social that i believe the CEO bought a couple

hundred thousand of stock but you haven't really seen the big insider buys here and you You haven't really seen, I've been really big in the dark arts recently, you haven't seen these companies come out and get really like, hey, our stock's gone from 20 to 5. We're going to take a big PSU package that only best if the stock starts hitting 15. But if it does, we'll make like multi-generational wealth, right? And I haven't seen either of those yet. Now, this has happened fast, right? We're talking October to April. A lot of incentive comp doesn't happen in kind of three to four months time.

But I have seen that elsewhere, like AVGO and AMD both gave their. CEOs massive, massive incentives comp that, you know, they gave it right before the Sox index went parabolic, and it seems like both of them are going to make $500 to a billion. I haven't seen that. I haven't seen the insider stepped up. I haven't seen directors come in. And I do wonder if it's kind of like, I'll just choose Adobe because we mentioned a few times.

Cool. They've got a $25 billion share buyback, but it's kind of like, hey, we'll return the shareholder money to them. But, you know, our money, things are pretty risky over here. We kind of want the all clear sign before we actually go put our money or our comp, or anything. So I threw a lot out there, but I'm kind of disappointed by the lack of the dark arts

or the real insider bullishness here. Yeah, and I think maybe if you give it time, things to get low on it, if you'll start to see some of that, you know, hasn't been that much time yet since this whole kind of sad, apocalypse craze. And I agree with you.

The buyback stuff never really impresses me. I think a lot of reason companies do it is because they think investors will celebrate it. But boards are notoriously, bad at assessing the valuation of their company and buybacks tend to be a pro-cyclical phenomenon where essentially if they have cash and tons are okay

they'll buy back a lot of shares. So Elise Adobe's kind of bucking that trend and saying like oh, we think our shares are undervalued and we're going to do something very aggressive. Again, I don't think it's enough. But a lot of the arguments you made around you're not seeing huge insider buying and so on and so forth. I think that's just the nature of a lot of unfortunately, a lot of tech where they're so hugely compensated in shares that they just tend

to be net sellers. And maybe that's something that will also structurally change. You're almost making the case for just a wave of activist pressure in the SaaS complex, which I think you could see at some point. But yeah, I mean, unfortunately, that's a state of things with SaaS where, you know, management team, there's net sellers just given the amount of compensation in stockcom. I mean, the longer I do this, I feel. like I'm going on crusade, but I do this and I, you know, you talk to these boards and they're like, hey, our board has a lot of experience. We're very motivated. You're like, bro, like everyone at your board, I can go find wherever their main job is. They're making, you know, five million dollars per year

over there. They get 60,000 in cashier and 140,000 of options every year. They've never bought a share. And you're going to tell me, hey, they, you know, they've vested into $300,000 worth of stock options. You're going to tell me, like, that's a motivating factor for them. And by the way, the stock sounds 75%. Like, I just think all these. These guys are so overpaid and it's just like, if the stock goes up, they're going to get fabulously wealthy. If the stock goes down, they're going to get wealthy. And I just like, it's as a shareholder who like, it's my money and my livelihood online.

I just increasingly and so infuriated by it. It's, I understand I'm not breaking new ground by saying, hey, there's a lot of execs overpaid. But it's just very frustrating. Yeah, I think the whole principal agent problems that boards are meant to kind of solve or help. I think they're woefully bad at. I think the structure needs to be changed. I don't know. I don't know what the right solution is, but it seems like, yeah, they just kind of show up,

take a check. They're not really there. You know, and especially this is even worse with smaller cap companies where the board's all like the CEO's buddies or something. So, like, yeah, I think there's just a lot of that needs to be rework and change. I don't think it's doing what it's supposed to do. Or, I mean, every time I talk to, like, our board is so incentivized. Like, no, like, hey, man.

I'm thinking of one in particular, which I won't not name, but like, hey, you have four board members and all of them are over the age of 65. One of them is 80 and she retired from her main job five years ago. And this is the only board she's on. Like, I'm pretty sure she's collecting a pension. I don't think she's like really here to drive shareholder value. And if the mainframe comes and says something, I don't think she's really putting a lot of thought into the pushback here. You know, I'm not trying to be ages, but I don't, you know, she's retired from everything. And yeah, it's just.

I can get on a, I can get on a soap box for hours, but I'm sure there's so much wrong. Yeah, it's really just about kind of putting, just perception, putting the right brass in place to show the market that you have a lot of these big hitters on your board or something. But is it for any sort of internal checks and balances or anything like that? No, I don't. Yeah, I think boards fall woefully short in that function. I totally agree. Oh, oh, man. Now I'm all worked up.

It's going to have to go on a run and get all this frustrated energy with the boards. making millions while my stocks go down thing. Anyway, anything you want to end with here? No. We mentioned, yeah, we write, published research for professional investors in RAs, so anybody who wants to check it up and visit our website atpronasterresearch.com. And Andrew, I've had a great time with the conversation. Thanks for thoughtful questions.

You always do a great job of that. And, yeah, hope to be on next time. Oh, open invite. Anytime you want to come on, whether it's SaaS or anything else. I know you guys cover tons of other stuff, but anytime we want to come on, open invite, I'll include a link to Pronoff's research in the show notes, and I'll include a link to the SaaS thread that I kind of liked in the show notes as well. So we can go from there.

Thanks so much for coming on, and we'll chat soon. Awesome. Thanks, Andrew. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.