Slack Stock Finds Some Footing After 52% Retreat From June High

Financial Markets Wall Street Slack IPO
ASSOCIATED PRESS

Shares of Slack (WORK) have been on a downward path since the direct listing in June, but are now starting to show some signs of stability. 

Yesterday, the stock fell to a new post-listing low of $19.86—52% below the high of $42 reached on the first day of trading. But the shares didn’t stay below the $20 level for long. As buyers emerged at the lows, the stock reversed to the upside and finished yesterday’s session with a gain of 4.9%.

Today, Slack shares are advancing 5%, helped out by Piper Jaffray starting coverage at ‘Overweight’ with a price target of $30. The firm thinks the risk/reward balance has turned favorable following the recent selloff.

Slack’s team collaboration platform, marketed as an alternative to email, faces intense competition from Microsoft, which bundles its Teams product with Office 365. In September, Slack surpassed 12 million daily active users, up 37% year over year. Microsoft in July said Teams had more than 13 million daily users.

Slack is currently on a strong expansion track, but the stock has been under pressure because of concerns about how the Microsoft threat will play out over the longer term. It doesn’t help that Slack isn’t profitable. While revenue in FY’20 (ending January) is expected to grow at least 50%, the company is forecasting free cash flow net burn of $100 million to $110 million.

Recently trading around $22.50 a share, Slack’s enterprise value is still a hefty 18.8 times the FY’20 revenue guidance midpoint of $606.5 million (representing growth of 51%). Using the FY’21 consensus revenue estimate of $847.6 million, the forward multiple of 13.4 looks a bit more reasonable relative to expected top-line growth of 39.2%.

In early September, Slack delivered its first quarterly earnings report as a public company. In FQ2 (ended July), total revenue of $145 million rose 58% and beat the consensus estimate by 3%. Adjusted for the negative impact of $8.2 million in credits given in FQ2 for service level disruption (hopefully a one-time thing), Slack’s revenue growth would have been 66%. Gross margin of 87.1% held fairly steady year over year.

Two of the company’s main goals are expansion within the existing customer base and growth in the number of enterprise accounts. In addition to 500,000+ organizations on the platform using the free version of the software, Slack ended FQ2 with more than 100,000 paid customers, up 37% from the year-ago level. There are now 720 paid customers with annualized recurring revenue (ARR) over $100,000 (up 75% year over year), a gain of 75 sequentially.

Slack’s Enterprise Grid is aimed directly at larger organizations. The offering connects multiple interconnected workspaces across a customer account—providing centralized administration, provisioning and control. Enterprise Grid can accommodate Slack’s largest customers, which currently have well over 100,000 active users. 

Enterprises are expected to be big users of Slack’s new Shared Channels offering, which enables inter-company collaboration. Shared Channels looks promising because it’s the first real network effect across customers. Slack gets more valuable for everyone as more people use it. With Shared Channels, users can securely collaborate with external partners, suppliers and their own customers. While still in the beta phase, Shared Channels managed to attract 20,000+ paid customers, giving it a 20% penetration rate.

Given that Shared Channels will be a core feature on the platform, it should be positive for Slack’s overall retention rate. Net dollar retention in FQ2 of 136% was solid, but down from 138% in FQ1 and 146% in the year-ago quarter. Since Shared Channels is fairly easy to navigate, it should attract a greater number of less-technical users (from segments such as customer service and marketing), expanding the potential pool beyond the core tech vertical. 

Slack needs to continue to expand into more non-tech segments to better challenge Microsoft. In FQ2, Slack’s R&D budget accounted for 38% of total revenue, as the company invests in the user experience, scalability and new features to try to stay ahead of the competition. In July, Slack released a new desktop client that improved performance significantly—it now starts faster, uses far less memory and is much less CPU-intensive. 

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Shares of Slack (WORK) have been on a downward path since the direct listing in June, but are now starting to show some signs of stability. 

Yesterday, the stock fell to a new post-listing low of $19.86—52% below the high of $42 reached on the first day of trading. But the shares didn’t stay below the $20 level for long. As buyers emerged at the lows, the stock reversed to the upside and finished yesterday’s session with a gain of 4.9%.

Today, Slack shares are advancing 5%, helped out by Piper Jaffray starting coverage at ‘Overweight’ with a price target of $30. The firm thinks the risk/reward balance has turned favorable following the recent selloff.

Slack’s team collaboration platform, marketed as an alternative to email, faces intense competition from Microsoft, which bundles its Teams product with Office 365. In September, Slack surpassed 12 million daily active users, up 37% year over year. Microsoft in July said Teams had more than 13 million daily users.

Slack is currently on a strong expansion track, but the stock has been under pressure because of concerns about how the Microsoft threat will play out over the longer term. It doesn’t help that Slack isn’t profitable. While revenue in FY’20 (ending January) is expected to grow at least 50%, the company is forecasting free cash flow net burn of $100 million to $110 million.

Recently trading around $22.50 a share, Slack’s enterprise value is still a hefty 18.8 times the FY’20 revenue guidance midpoint of $606.5 million (representing growth of 51%). Using the FY’21 consensus revenue estimate of $847.6 million, the forward multiple of 13.4 looks a bit more reasonable relative to expected top-line growth of 39.2%.

In early September, Slack delivered its first quarterly earnings report as a public company. In FQ2 (ended July), total revenue of $145 million rose 58% and beat the consensus estimate by 3%. Adjusted for the negative impact of $8.2 million in credits given in FQ2 for service level disruption (hopefully a one-time thing), Slack’s revenue growth would have been 66%. Gross margin of 87.1% held fairly steady year over year.

Two of the company’s main goals are expansion within the existing customer base and growth in the number of enterprise accounts. In addition to 500,000+ organizations on the platform using the free version of the software, Slack ended FQ2 with more than 100,000 paid customers, up 37% from the year-ago level. There are now 720 paid customers with annualized recurring revenue (ARR) over $100,000 (up 75% year over year), a gain of 75 sequentially.

Slack’s Enterprise Grid is aimed directly at larger organizations. The offering connects multiple interconnected workspaces across a customer account—providing centralized administration, provisioning and control. Enterprise Grid can accommodate Slack’s largest customers, which currently have well over 100,000 active users. 

Enterprises are expected to be big users of Slack’s new Shared Channels offering, which enables inter-company collaboration. Shared Channels looks promising because it’s the first real network effect across customers. Slack gets more valuable for everyone as more people use it. With Shared Channels, users can securely collaborate with external partners, suppliers and their own customers. While still in the beta phase, Shared Channels managed to attract 20,000+ paid customers, giving it a 20% penetration rate.

Given that Shared Channels will be a core feature on the platform, it should be positive for Slack’s overall retention rate. Net dollar retention in FQ2 of 136% was solid, but down from 138% in FQ1 and 146% in the year-ago quarter. Since Shared Channels is fairly easy to navigate, it should attract a greater number of less-technical users (from segments such as customer service and marketing), expanding the potential pool beyond the core tech vertical. 

Slack needs to continue to expand into more non-tech segments to better challenge Microsoft. In FQ2, Slack’s R&D budget accounted for 38% of total revenue, as the company invests in the user experience, scalability and new features to try to stay ahead of the competition. In July, Slack released a new desktop client that improved performance significantly—it now starts faster, uses far less memory and is much less CPU-intensive. 

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I have covered the technology sector for more than 20 years. Since 2003, I have been the managing editor of Tech-Stock Prospector, a monthly publication offering researc...