Earnings & Rating Updates: SPT, TXG, DDOG
Sprout Social (SPT) was a rare bright spot in software yesterday, as the company’s Q3 report shined a light on this little company’s potential once again. Revenue in the quarter of $33.7 million was up 27% and beat by $700K while adjusted EPS of -$0.09 beat by $0.03. Management also issued full-year guidance of around $131.5 million, just a hair over the consensus of $130 million. In response the stock, which sold two days ago, bounced back to recover nicely and is currently trading roughly 11% below its all-time high. Not bad given the drubbing growth stocks have taken.
Overall, the quarter was solid and it appears Sprout Social is fulfilling a very real need to manage social engagements as social spreads across organizations to touch many departments. The biggest takeaway right now might just be that the stock is resilient in the face of so much selling pressure elsewhere. Taken together, I think we’re in good shape here. That said, it doesn’t feel like a good time to get too aggressive with software stocks, so let’s move Sprout Social to hold and see how things go over the coming days. We’re up around 25%. HOLD
10X Genomics (TXG) reported Q3 results that beat on the top line and missed on the bottom line. Revenue was up 17% to $72 million while adjusted EPS of -$0.65 missed by $0.34. The pandemic has hurt labs as many were forced to close down. From the beginning of Q2 to the end of Q3 the company went from seeing 60% of labs open to 80%. Not all are up to full speed, but the recovery there is helping consumables sales (up 22% to nearly $61 million, or almost 85% of total revenue). Instrument sales are still being hurt by the pandemic (hard for customers to justify a big CapEx investment these days).
Despite all the pandemic-related challenges management said it sees orders up 35% in Q4. That’s far better than expected, though the raging pandemic and end-of-year spending/constraints/shutdowns/budget flush dynamics could mean the end result is quite different from what seems likely now. But taking everything in, including a significant retreat in shares (18% off highs) and bullish commentary from analysts we’re leaning in here. Keeping TXG at buy. BUY
Datadog (DDOG) is in a tricky spot after reporting Q3 results yesterday. They were good – revenue was up 61% to $155 million and beat by over $10 million while adjusted EPS of $0.05 beat by $0.04. However, most analysts following the stock, including our very own Mike Cintolo, who recently issued a sell notice on DDOG in Cabot Growth Investor, are concerned with the troubling mix of steep valuation and decelerating growth. Those are valid concerns. Revenue was up 87% in Q1, 86% in Q2, 61% in the just reported Q3 and is on pace to be up just 44% in Q4 based on management’s guidance, which may prove to be quite conservative (or not). Looking out to 2021 consensus revenue growth estimates will likely land somewhere in the 35% to 40% range.
Digging slightly deeper we see that the company added 1,000 net new customers in Q3. That’s well above the 600 added in Q2 and is close to pre-COVID levels. Annual recurring revenue was a record as customers signed up for more solutions (71% using more than two products, up from 50% in 2019 and 20% are using four or more, up from 7% a year ago).
Taking it all in, most analysts have turned neutral on DDOG stock right now. Shares are down around 12% today and roughly 30% off their high (118, hit on October 13). Stripping out the early October rally, DDOG is in the middle of what would otherwise be an extended consolidation phase, between 72 and 99 (stock is at 82 now).
We took partial profits at 78.93 to lock in a 104% gain on half of our position on August 7.
What do we do now?
I’d like to hold on to the remaining half. My reasoning is that this is one of the best names in software and investors will come back to it once some of the air has come out (happening now). Developments on the vaccine front could lead to some investors taking a longer view, and we could see a sustained return to “normal” operations in 2021. I’m not expecting a return to 60%-plus growth, but we don’t need that for this stock to work again. We have solid support near 72 (roughly 10% below here) that can act as our get-out point should we get there.
Why is my view different from Mike’s? Mainly because we have a lot more meat on the bone to work with. We’re still up over 100%. Also, we just cut Dynatrace (DT) loose yesterday for a 70% gain and I don’t want to completely eliminate our exposure to the end markets that Datadog and Dynatrace play in. Keeping a half position in one of these stocks makes sense to me now. Provided growth stocks don’t fall apart (a scenario that’s not off the table) I think analysts will come back to DDOG in early 2021 saying, essentially, time has passed, valuation has come down, risk profile has changed, yada, yada, yada, moving to overweight.
All that said, I won’t fault anybody for selling out of DDOG now or taking their exposure down. My suggestion would be to maintain at least a token-sized position. HOLD