Some stocks are best avoided. It hits us in the gut when we see fellow investors suffer a loss. Anyone who held Sprout Social, Inc. (NASDAQ:SPT) for five years would be nursing their metaphorical wounds since the share price dropped 89% in that time. We also note that the stock has performed poorly over the last year, with the share price down 76%. Unfortunately the share price momentum is still quite negative, with prices down 23% in thirty days. While a drop like that is definitely a body blow, money isn't as important as health and happiness.

Since Sprout Social has shed US$86m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.

Because Sprout Social made a loss in the last twelve months, we think the market is probably more focussed on revenue and revenue growth, at least for now. Shareholders of unprofitable companies usually desire strong revenue growth. Some companies are willing to postpone profitability to grow revenue faster, but in that case one would hope for good top-line growth to make up for the lack of earnings.

In the last half decade, Sprout Social saw its revenue increase by 25% per year. That's better than most loss-making companies. So on the face of it we're really surprised to see the share price has averaged a fall of 14% each year, in the same time period. You'd have to assume the market is worried that profits won't come soon enough. We'd recommend carefully checking for indications of future growth - and balance sheet threats - before considering a purchase.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

Sprout Social is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. You can see what analysts are predicting for Sprout Social in this interactive graph of future profit estimates.

A Different Perspective

Investors in Sprout Social had a tough year, with a total loss of 76%, against a market gain of about 14%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 14% over the last half decade. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. Shareholders might want to examine this detailed historical graph of past earnings, revenue and cash flow.

If you are like me, then you will not want to miss this free list of undervalued small caps that insiders are buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.