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Sprout Social, Inc.

Case Details

Class Period: November 3, 2021 - May 2, 2024
Date Filed: July 02, 2024
Case Number: 1:24-cv-05582
Jurisdiction: Northern District of Illinois
icon-casetype Case Type: Securities Case

Case Summary

Based in Chicago, Illinois, Sprout Social is a software company that offers a centralized platform for businesses to manage social media marketing and operations.  Leading up to and during the Class Period, Sprout Social changed its mix of customers, transitioning away from smaller customers on month-to-month contracts to larger, or “enterprise,” customers that would sign annual contracts.  Throughout the Class Period, Defendants touted the “continued momentum” with larger customers and “our ability to kind of go upmarket.”  Defendants further assured investors that as the Company moved “upmarket,” Sprout Social was “keeping the sales cycle moving quickly.”

The Expanded Action alleges that, during the Class Period, the Defendants made materially false and misleading statements and failed to disclose that: (1) Sprout Social did not have the ability to sell software to larger enterprise customers; (2) Sprout Social did not execute on its purported go-to-market strategies for enterprise customers; (3) Sprout Social was forced to overpay for Tagger Media, Inc. (“Tagger”) in order to satisfy the requirements of enterprise customers; (4) as a result of the Company’s move “upmarket,” Sprout Social was experiencing longer sales cycles and poor pipeline generation; and (5) as a result of the above, Defendants’ statements about Sprout Social’s business, operations, and prospects were materially false and misleading and/or lacked a reasonable basis at all relevant times.

These failures, misrepresentations, and other undisclosed issues were revealed to the market through public disclosures in 2023 and 2024.  The truth was partially revealed on August 3, 2023, when Sprout Social announced the Tagger acquisition, which cost $140 million, and lowered its full-year revenue guidance.  The Company explained that it acquired Tagger, a leader in influencer marketing, because influencer marketing was a routine requirement of the Company’s enterprise customer base.  On this news, the price of Sprout Social stock fell 12.3%, from a closing price of $53.38 per share on August 2, 2023, to a closing price of $46.81 per share on August 4, 2023.

The truth was fully revealed to investors after the markets closed on May 2, 2024, when Sprout Social issued a press release announcing financial results for the first quarter of 2024 that included a $20 million downward revision to 2024 revenue guidance.  Among other things, Defendants disclosed that Sprout Social was experiencing longer sales cycles due to the changing composition of its customer base.  On this news, the price of Sprout Social stock plummeted more than 40%, from a closing price of $48.15 per share on May 2, 2024, to a closing price of $28.82 per share on May 3, 2024.