Sprout Social Sets Rule of 40 Target Amidst Persistent Growth Deceleration Concerns

What happened

Sprout Social announced its Q4 2025 financial results, highlighting a 22% growth in subscription revenue from customers with ≥$30K ARR in 2025, showcasing continued enterprise traction. The company introduced a new Non-GAAP Rule of 40 target of 30% by Q4 2027, signaling a commitment to balancing growth and profitability over the long term. This comes against the backdrop of decelerating cRPO growth, as noted in the DeepValue report, which has slowed from 21% to 17% YoY in 2025, raising doubts about near-term demand stabilization. Key risks from the report, such as the unresolved CFO transition and $73 million in near-term purchase commitments, underscore ongoing execution and cash flow pressures. Despite the positive cohort metric, the stock remains deeply discounted and unloved, reflecting market skepticism about the company's ability to reverse growth trends.

Implication

The Rule of 40 target formalizes management's focus on operational discipline, potentially supporting non-GAAP margin preservation and aligning with the base investment thesis of durability over growth-at-any-cost. However, the 22% growth in high-value customers does not immediately resolve the cRPO deceleration concern, indicating that enterprise mix shift alone may not drive a bookings inflection without broader demand improvement. With the target set for 2027, near-term uncertainties loom, including the CFO vacancy and cash commitments that could strain liquidity if revenue growth undershoots. If the next earnings shows cRPO growth holds or re-accelerates, the stock could benefit from reduced uncertainty, but failure could trigger the bear case and further downside. Investors must prioritize monitoring the upcoming earnings for cRPO trends and an 8-K on CFO hire, as these will determine whether the thesis remains intact.

Thesis delta

The new Rule of 40 target introduces a long-term profitability-growth framework, reinforcing the operational discipline narrative but not altering the core near-term thesis. The investment case still hinges on cRPO growth stabilizing above 14% YoY and non-GAAP margins remaining above 8%, with the target adding context for 2027 without mitigating immediate execution risks. Thus, while the target may boost confidence in management's strategic direction, it does not shift the critical dependencies on demand indicators and CFO stability.