Please ensure Javascript is enabled for purposes of website accessibility
Small-Cap Confidential
Undiscovered stocks that can make you rich

November 10, 2020

Tyler updates us on two more stocks that reported earnings recently.

Sprout Social (SPT) and RePay (RPAY) Report Q3

Sprout Social (SPT) is a rare bright spot in software today, as the company’s Q3 report yesterday has 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 off yesterday, has bounced back to recover half of yesterday’s losses and trades within 12% of an all-time high. Not bad given the current drubbing growth stocks are taking.

Moving on to details, it’s clear that companies are looking for help engaging digitally with their customers, and the pandemic likely powers some of that demand. Sprout Social added 1,200 customers in the quarter and now has 25,556 customers in all. It landed the biggest contact in its history too. Certain solutions, including Listening and Premium Analytics, grew by over 100%. Another positive is the bottom-line improvement (despite investments), which means there is leverage in this business as it grows. Management will continue to invest in growth-oriented initiatives.

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

Repay Holdings (RPAY) hasn’t had such a good day. Shares are off more than 10%, although the stock has thus far held above support at 22. The last time RPAY was at that price was the day before Halloween, so we’re still in the stock’s comfort zone (it has been between 21 and 28 since the end of May). In terms of Q3, revenue was up 43% to $37.6 million while adjusted EPS of $0.12 beat by $0.01. Card payment volume rose 44% to $3.8 billion.

Management talked about the accelerating demand for electronic payments and the resilience of loan payments despite the impacts of the pandemic. Business has been good in both the auto and mortgage servicing areas. Management also talked about M&A potential and the large pipeline of potential deals Repay now has. Past deals are a big part of the story here. In Q3 the collective revenue impact from the TriSource, APS, and CPA acquisitions was $10.2 million, or 27% of total revenue.

On the downside, management was cautious on Q4 due to a murky personal loan market, which is suffering without further stimulus. Full-year revenue guidance has narrowed to $148 million to $153 million, which straddles the consensus of $150 million.

Why is the stock down? In a normal market (whatever that looks like) I’d expect the stock to be flat to slightly down on this report. At the end of the day, there’s nothing major here and nothing to get super excited about right now. The growth story is largely about gradually adding payments to the platform organically and making step changes through acquisitions, then letting all these payments build and build month after month. All the while Repay takes its cut of the transactions. Looking forward, investors will likely want to see more deals, and maybe there is some concern about borrowing costs as interest rates are ticking higher this week. There may also be some concern that people will go back to writing checks or paying in person when the pandemic abates. I’m not convinced of that – once people convert to digital payments it’s hard to imagine a devolution cycle where people revert to their primitive ways. Or maybe I’m wrong, and paper checks will be the surprise trend of 2021!

The bottom line here is that the story is intact, and we have to mind the chart. If RPAY breaks below support in the 21 to 22 area, we’ll likely cut it loose. Until then, we’ll keep at buy. BUY