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Sept. 4, 2019, 11:55 a.m. EDT

Slack’s missteps have now made the stock a ‘buy’ at the right price

The company went public at a time of slowing growth, yet the tiny rival to Microsoft seems to be winning the instant-messaging war

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By Beth Kindig


Getty Images for SiriusXM
Slack CEO Stewart Butterfield

Slack Technologies is the fastest-growing software-as-a-service (SaaS) company of all time and a Silicon Valley favorite, yet the direct public offering (DPO) clearly did not go well for public investors.

The shares /zigman2/quotes/212180539/composite WORK -6.74%  opened at $38.50 on June 20, rose to $42 intraday, and have now sunk to a record-low of $26.25 in after-market hours leading into its first earnings report as a public company.

The losses are at 36% from its intraday high, and that occurred when many cloud-software initial public offerings (IPOs) have enjoyed triple-digit returns since going public.

So what went wrong? And, more importantly for growth investors, will things go right for San Francisco-based Slack soon?

Before the company releases second-quarter earnings Sept. 4, here’s insight into its revenue, valuation and competitors.

Slower growth

Slack’s product — an instant-messaging and collaboration system — has massive potential with a 143% net customer retention rate, yet the financials undermine the company’s growth trajectory. For instance, guidance for the current fiscal year is at 47% to 50% revenue growth year-over-year, down from 82% in the prior year. The slower growth, which was revealed in an updated prospectus two weeks before going public, was unlikely to win over many people regardless of how much traction the product has with current users.

Yet, there is impressive traction, with the average user keeping the app open for nine hours on her computer and engaging with it for 90 minutes a day. Compare that with the daily time spent on Facebook /zigman2/quotes/205064656/composite FB +0.69%  58 minutes, Instagram, 53 minutes, YouTube, 40 minutes, Pinterest, 14 minutes, and messaging app WhatsApp, 28 minutes.

As I covered before the DPO, both sides of the debate have valid points when evaluating Slack’s future stock performance. However, due to Slack’s product strength, my prediction is the stock will have a turnaround as user loyalty will overcome the financial turbulence. The questions that remain: timing and valuation for entry.

Divergence in user base

Slack’s revenue grew 110% in fiscal years 2017-2018, and then slowed to 82% in 2018-2019. The company is now forecasting 47%-50% growth in the current fiscal year with revenue between $590 million and $600 million, compared with $400 million in fiscal 2019. This year’s estimated adjusted loss is estimated to be 41 cents to 44 cents a share.

On June 3, Slack released an updated prospectus that showed growth in customers worth over $100,000 in contracts, yet revealed a decline across paid user growth from 9,000 in the year-earlier quarter to 7,000 in the current quarter.

In other words, there is a divergence as overall paid users are declining, while customer accounts worth over $100,000 are growing. That could be because of internal efforts to raise revenue and focus on enterprise-level customers, which is a common strategy leading up to public offerings. More quarterly earnings are needed to ultimately decide which direction this will go, and if the larger accounts will pay off as a primary focus for growth.

Slack provided the net dollar retention rate in the S-1 filing, which depicts what percent of revenue from current customers is retained from the prior year, after accounting for upgrades, downgrades and churn. This is helpful in predicting growth for subscription-based companies.

The formula for the net dollar retention rate is: Beginning of period revenue + upgrades – downgrades + churn = y with y/beginning of period revenue.

If the net dollar retention rate is above 100%, then the growth from the existing customer base offsets the losses. If the number is below 100%, then downgrades and churn exceed growth.

Slack published a net retention rate of 143%, which is very good and outperforms most cloud software IPOs that provided this number in the past. This is due to Slack’s sticky traction and low churn with the current customer base.

Company Ticker S1 net retention S1 year Most recent net retention
2U Inc. /zigman2/quotes/201921395/composite TWOU 144% 2013 N/A
Box Inc. Class A /zigman2/quotes/208773138/composite BOX 136% 2015 110%
Alteryx Inc. Class A /zigman2/quotes/202651591/composite AYX 134% 2017 131%
Smartsheet Inc. Class A /zigman2/quotes/207006006/composite SMAR 130% 2018 130%
Okta Inc. Class A /zigman2/quotes/210420951/composite OKTA 123% 2017 123%
Q2 Holdings Inc. /zigman2/quotes/203491356/composite QTWO 122% 2014 122%
Yext Inc. /zigman2/quotes/201169127/composite YEXT 119% 2017 119%
BlackLine Inc. /zigman2/quotes/200309738/composite BL 116% 2016 112%
Everbridge Inc. /zigman2/quotes/202832262/composite EVBG 116% 2016 110%
Zscaler Inc. /zigman2/quotes/203585803/composite ZS 115% 2017 117%
DocuSign Inc. /zigman2/quotes/205992027/composite DOCU 115% 2018 115%
Workiva Inc. Class A /zigman2/quotes/202545331/composite WK 114% 2013 108%
Marin Software Inc. /zigman2/quotes/201535212/composite MRIN 114% 2012 N/A
Appian Corp. Class A /zigman2/quotes/203658597/composite APPN 112% 2016 122%
Zuora Inc. Class A /zigman2/quotes/203058166/composite ZUO 110% 2018 110%
Castlight Health Inc. Class B /zigman2/quotes/201298689/composite CSLT 109% 2013 104%
SecureWorks Corp. Class A /zigman2/quotes/202179762/composite SCWX 102% 2016 98%
Shopify Inc. Class A /zigman2/quotes/209033712/composite SHOP 101% 2014 N/A
Instructure Inc. /zigman2/quotes/200628597/composite INST 100% 2015 100%
Five9 Inc. /zigman2/quotes/209043265/composite FIVN 100% 2013 98%
Channeladvisor Corp. /zigman2/quotes/208422285/composite ECOM 100% 2012 N/A
RingCentral Inc. Class A /zigman2/quotes/204236620/composite RNG 99% 2013 99%
Tabula Rasa Healthcare Inc. /zigman2/quotes/201220766/composite TRHC 96% 2015 95%
Cornerstone Ondemand Inc. /zigman2/quotes/201253732/composite CSOD 96% 2010 94%
Benefitfocus Inc. /zigman2/quotes/204534086/composite BNFT 95% 2013 95%
SVMK Inc. /zigman2/quotes/204753223/composite SVMK 95% 2018 95%
HubSpot Inc. PL:HUB 93% 2014 101%
Paylocity Holding Corp. /zigman2/quotes/206986696/composite PCTY 92% 2014 92%
Paycom Software Inc. /zigman2/quotes/208108773/composite PAYC 91% 2013 91%
Upland Software Inc. /zigman2/quotes/202844620/composite UPLD 90% 2013 93%
Dropbox Inc. Class A /zigman2/quotes/205896836/composite DBX   90% 2017 90%
Median 109% 104%

One thing to note about the retention rate is that Slack officially launched in 2014, and has a shorter history than other companies on this list with many having launched 10 years prior to IPO compared with Slack’s five years. Typically, the longer the time period, the lower the net retention rate due to more opportunity for customer churn.

See: Beth Kindig runs a forum on tech stocks where she answers readers’ questions.

Valuation

Slack’s valuation is high — there’s no argument there. If we look at the $600 million in estimated revenue for fiscal 2020 at the $14 billion market cap, then Slack has a forward price-to-sales (P/S) ratio of 24.

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US : U.S.: NYSE
$ 20.75
-1.50 -6.74%
Volume: 22.00M
Dec. 11, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$11.42 billion
Rev. per Employee
N/A
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/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 202.26
+1.39 +0.69%
Volume: 8.04M
Dec. 11, 2019 4:00p
P/E Ratio
32.31
Dividend Yield
N/A
Market Cap
$576.94 billion
Rev. per Employee
$1.57M
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/zigman2/quotes/201921395/composite
US : U.S.: Nasdaq
$ 21.99
-0.59 -2.59%
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Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.40 billion
Rev. per Employee
$159,415
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/zigman2/quotes/208773138/composite
US : U.S.: NYSE
$ 17.02
-0.18 -1.05%
Volume: 1.22M
Dec. 11, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.55 billion
Rev. per Employee
$307,266
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/zigman2/quotes/202651591/composite
US : U.S.: NYSE
$ 98.41
-9.20 -8.55%
Volume: 7.46M
Dec. 11, 2019 6:30p
P/E Ratio
520.69
Dividend Yield
N/A
Market Cap
$6.40 billion
Rev. per Employee
$316,962
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/zigman2/quotes/207006006/composite
US : U.S.: NYSE
$ 42.89
-0.97 -2.21%
Volume: 783,730
Dec. 11, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$5.03 billion
Rev. per Employee
$225,822
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/zigman2/quotes/210420951/composite
US : U.S.: Nasdaq
$ 117.65
-1.96 -1.64%
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Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$14.27 billion
Rev. per Employee
$255,768
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/zigman2/quotes/203491356/composite
US : U.S.: NYSE
$ 77.83
-1.63 -2.05%
Volume: 380,363
Dec. 11, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$3.75 billion
Rev. per Employee
$202,605
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/zigman2/quotes/201169127/composite
US : U.S.: NYSE
$ 14.00
+0.29 +2.12%
Volume: 1.47M
Dec. 11, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.60 billion
Rev. per Employee
$253,648
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/zigman2/quotes/200309738/composite
US : U.S.: Nasdaq
$ 50.70
-0.62 -1.21%
Volume: 402,391
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.82 billion
Rev. per Employee
$267,986
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/zigman2/quotes/202832262/composite
US : U.S.: Nasdaq
$ 79.82
-3.41 -4.10%
Volume: 2.13M
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.70 billion
Rev. per Employee
$189,310
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/zigman2/quotes/203585803/composite
US : U.S.: Nasdaq
$ 45.20
-0.93 -2.02%
Volume: 2.25M
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$5.78 billion
Rev. per Employee
$231,369
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/zigman2/quotes/205992027/composite
US : U.S.: Nasdaq
$ 72.46
-0.33 -0.45%
Volume: 1.95M
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$13.00 billion
Rev. per Employee
$310,851
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/zigman2/quotes/202545331/composite
US : U.S.: NYSE
$ 41.53
-0.34 -0.81%
Volume: 169,387
Dec. 11, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.93 billion
Rev. per Employee
$185,249
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/zigman2/quotes/201535212/composite
US : U.S.: Nasdaq
$ 1.27
-0.03 -2.31%
Volume: 22,788
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$8.44 million
Rev. per Employee
$200,791
loading...
/zigman2/quotes/203658597/composite
US : U.S.: Nasdaq
$ 39.57
-1.75 -4.24%
Volume: 392,816
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.66 billion
Rev. per Employee
$214,313
loading...
/zigman2/quotes/203058166/composite
US : U.S.: NYSE
$ 14.21
-0.28 -1.93%
Volume: 1.77M
Dec. 11, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.60 billion
Rev. per Employee
$252,086
loading...
/zigman2/quotes/201298689/composite
US : U.S.: NYSE
$ 1.31
-0.01 -0.76%
Volume: 608,417
Dec. 11, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$191.49 million
Rev. per Employee
$332,774
loading...
/zigman2/quotes/202179762/composite
US : U.S.: Nasdaq
$ 13.00
-0.87 -6.27%
Volume: 186,416
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.06 billion
Rev. per Employee
$199,081
loading...
/zigman2/quotes/209033712/composite
US : U.S.: NYSE
$ 373.08
+5.08 +1.38%
Volume: 1.84M
Dec. 11, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$43.24 billion
Rev. per Employee
$268,307
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/zigman2/quotes/200628597/composite
US : U.S.: NYSE
$ 48.28
-0.23 -0.47%
Volume: 641,041
Dec. 11, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.84 billion
Rev. per Employee
$171,898
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/zigman2/quotes/209043265/composite
US : U.S.: Nasdaq
$ 65.37
-0.37 -0.56%
Volume: 449,195
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$3.99 billion
Rev. per Employee
$262,120
loading...
/zigman2/quotes/208422285/composite
US : U.S.: NYSE
$ 9.23
-0.04 -0.43%
Volume: 63,268
Dec. 11, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$258.99 million
Rev. per Employee
$179,751
loading...
/zigman2/quotes/204236620/composite
US : U.S.: NYSE
$ 162.37
-3.19 -1.93%
Volume: 932,933
Dec. 11, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$13.98 billion
Rev. per Employee
$360,034
loading...
/zigman2/quotes/201220766/composite
US : U.S.: Nasdaq
$ 38.81
-1.03 -2.59%
Volume: 183,755
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$861.78 million
Rev. per Employee
$214,569
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/zigman2/quotes/201253732/composite
US : U.S.: Nasdaq
$ 56.56
-2.11 -3.60%
Volume: 495,395
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$3.43 billion
Rev. per Employee
$275,418
loading...
/zigman2/quotes/204534086/composite
US : U.S.: Nasdaq
$ 19.80
-0.76 -3.67%
Volume: 427,478
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$648.09 million
Rev. per Employee
$178,428
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/zigman2/quotes/204753223/composite
US : U.S.: Nasdaq
$ 17.55
+0.47 +2.75%
Volume: 553,010
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.36 billion
Rev. per Employee
$296,761
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PL : Poland: Warsaw
0.40
+0.06 +17.40%
Volume: 1,918
Sept. 25, 2019 12:00a
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
zł12.74 million
Rev. per Employee
N/A
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/zigman2/quotes/206986696/composite
US : U.S.: Nasdaq
$ 120.26
-0.17 -0.14%
Volume: 277,017
Dec. 11, 2019 4:00p
P/E Ratio
115.38
Dividend Yield
N/A
Market Cap
$6.44 billion
Rev. per Employee
$160,666
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/zigman2/quotes/208108773/composite
US : U.S.: NYSE
$ 262.07
-3.43 -1.29%
Volume: 567,992
Dec. 11, 2019 6:30p
P/E Ratio
91.86
Dividend Yield
N/A
Market Cap
$15.30 billion
Rev. per Employee
$185,684
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/zigman2/quotes/202844620/composite
US : U.S.: Nasdaq
$ 35.31
-0.91 -2.51%
Volume: 352,111
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$891.97 million
Rev. per Employee
$224,715
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/zigman2/quotes/205896836/composite
US : U.S.: Nasdaq
$ 17.24
-0.57 -3.20%
Volume: 8.20M
Dec. 11, 2019 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$7.16 billion
Rev. per Employee
$599,096
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