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June 20, 2019, 7:36 a.m. EDT

Slack non-IPO is worth buying under only 1 of these 3 scenarios

Slack is going public with a direct listing, so there’s no order-taking and final IPO price

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By David Trainer, Kyle Guske II and Sam McBride


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Slack Technologies /zigman2/quotes/212180539/composite WORK -4.36%  plans to go public on Thursday through a direct listing. This unconventional process — similarly utilized by Spotify Technology /zigman2/quotes/207488629/composite SPOT -1.95% last year — means Slack’s shares begin trading without raising any new capital for the company.

Direct listings allow companies to gain liquidity for their stock without paying $100 million-plus in fees to investment banks or diluting existing shareholders. However, without the standard IPO “book building” provided by investment banks, direct listings endure significant uncertainty regarding the initial share price. Slack’s shares have traded at prices anywhere from $8.37 to $31.50 a share since January 2018, according to their S-1.

With so much volatility in private markets and limited analyst coverage prior to trading, it can be difficult for investors to determine a fair value for the stock. This report aims to sort through Slack’s fundamentals, project plausible scenarios for the company’s future, and determine the fair value of the using our reverse DCF model .

Read: Slack non-IPO: 5 things to know about the direct listing

Slack: The Future of Work?

Slack (an acronym for Searchable Log of All Conversation and Knowledge) began its life as an internal messaging platform for a company developing an online game called Glitch. After the game went defunct, CEO Stewart Butterfield made Slack available to the public in 2013.

From these humble beginnings, Slack has grown into a service with over 10 million daily active users in more than 500,000 organizations, including about two-thirds of the Fortune 100. As Figure 1 shows, Slack has more than quadrupled the number of customers that pay over $100,000 annually since 2017.

Figure 1: Customers generating more than $100,000 in annual recurring revenue since 2016

Sources: New Constructs, LLC and company filings

While the company still has a reputation as a messaging app for startups, Figure 1 shows that it now earns over 40% of its revenue from these mega-customers. Slack ultimately wants to touch every aspect of the workflow process for everyone from small businesses to multinational conglomerates. The company sums up its ambition in a sentence that is repeated four times throughout its S-1 :

“Slack is a new layer of the business technology stack that brings together people, applications, and data — a single place where people can effectively work together, access hundreds of thousands of critical applications and services, and find important information to do their best work.”

Slack wants to be the home screen for your office and integrate with thousands of third-party applications to keep every aspect of an organization’s work in a single, easily visible space. Slack needs to be much more than just a messaging app in order to convince companies to keep paying $100,000 or more annually (or investors to value the company at $17 billion or more). Changing its ticker from SK to WORK symbolizes this ambition to investors

Mounting competition as Slack proves viability

As Slack has pushed to expand the scope of its offering and the size of its clientele, it’s starting to face more competition. Traditional enterprise giants Microsoft /zigman2/quotes/207732364/composite MSFT +0.11%  and Cisco /zigman2/quotes/209509471/composite CSCO +0.93%  have introduced Slack competitors, as have tech giants Alphabet /zigman2/quotes/205453964/composite GOOG -0.0017%   /zigman2/quotes/202490156/composite GOOGL +0.04%  and Facebook /zigman2/quotes/205064656/composite FB -0.51% .

These competitors have already made significant inroads into the collaboration software market. Microsoft’s Teams app already boasts 500,000 organizations as users , while Facebook’s Workplace claims over 2 million individuals as paying users.

Slack has some notable advantages over these competitors, especially its brand cachet with young professionals. On the other hand, the tech giants have their own advantages, such as more significant relationships with large enterprise clients, ownership of other essential business applications (i.e. Microsoft Office), and greater resources to devote to research in artificial intelligence and other key areas that could improve the user experience.

Figure 2 shows that mounting competition has led to slowing growth at Slack. The company’s revenue grew by 110% in 2017, 82% in 2018, and 67% year-over-year in the first quarter of 2019. Meanwhile, profits are nonexistent as the company lost over $100 million in 2017 and 2018 and is on pace to do so again in 2019.

Figure 2: Revenue growth and NOPAT* for Slack: 2017-Q1 2019

Sources: New Constructs, LLC and company filings. *2019 NOPAT represents the annualized first-quarter results

Slack’s revenue growth is decelerating despite the fact that the company’s $400 million in 2018 revenue represents just 1% of its projected $28 billion addressable market. This disconnect suggests that either Slack’s market opportunity is less than the company projects or that it is struggling to capture as big a share of the market as it hopes.

Public shareholders have no rights (for now)

Public shareholders will get almost no voting rights after Slack goes public, as has become the norm in recent years. The Class A shares available on public markets will have one vote, while the Class B shares held by insiders and early investors will get 10 votes per share. The Class B shares held by Slack’s executives and directors currently account for 66% of the voting rights in the company, so Slack will be entirely controlled by insiders after the direct listing.

The one bit of good news for investors is that these Class B shares have a sunset clause. On the 10th anniversary of the filing of the S-1, all shares outstanding will convert automatically into a single share of common stock. They’ll have to wait until 2029, but eventually public shareholders will have a say in the governance of Slack.

/zigman2/quotes/212180539/composite
US : U.S.: NYSE
$ 32.00
-1.46 -4.36%
Volume: 6.85M
July 18, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$16.88 billion
Rev. per Employee
N/A
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/zigman2/quotes/207488629/composite
US : U.S.: NYSE
$ 145.20
-2.89 -1.95%
Volume: 1.41M
July 18, 2019 4:01p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$26.30 billion
Rev. per Employee
N/A
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/zigman2/quotes/207732364/composite
US : U.S.: Nasdaq
$ 136.42
+0.15 +0.11%
Volume: 30.81M
July 18, 2019 4:00p
P/E Ratio
26.91
Dividend Yield
1.35%
Market Cap
$1044.21 billion
Rev. per Employee
$902,473
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/zigman2/quotes/209509471/composite
US : U.S.: Nasdaq
$ 57.74
+0.53 +0.93%
Volume: 10.29M
July 18, 2019 4:00p
P/E Ratio
19.91
Dividend Yield
2.42%
Market Cap
$244.90 billion
Rev. per Employee
$684,933
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/zigman2/quotes/205453964/composite
US : U.S.: Nasdaq
$ 1,146.33
-0.02 -0.0017%
Volume: 1.29M
July 18, 2019 4:00p
P/E Ratio
28.70
Dividend Yield
N/A
Market Cap
$795.85 billion
Rev. per Employee
$1.39M
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/zigman2/quotes/202490156/composite
US : U.S.: Nasdaq
$ 1,147.24
+0.50 +0.04%
Volume: 1.27M
July 18, 2019 4:00p
P/E Ratio
28.78
Dividend Yield
N/A
Market Cap
$796.12 billion
Rev. per Employee
$1.39M
loading...
/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 200.78
-1.02 -0.51%
Volume: 11.96M
July 18, 2019 4:00p
P/E Ratio
29.83
Dividend Yield
N/A
Market Cap
$576.04 billion
Rev. per Employee
$1.57M
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