Slack Technologies (NYSE: WORK) has been a division stock since its direct listing in June. The bulls claimed that Slack’s collaborative platform would disrupt traditional messaging and messaging markets and change the way people worked. The bears claimed that Slack’s moat was not wide enough to repel rivals like Microsoft (NASDAQ: MSFT), and that a long-term path to profitability was missing.
The bulls initially raised the title of its top prize from $ 26 to the highest of $ 30, but then returned to the high level of $ 20 – even though home support measures sparked interest in the title. Slack certainly faces many short-term challenges, but will its stock increase over the next five years?
What do Slack bears think?
Slack’s revenues increased 110% in fiscal 2018, 82% in 2019 and 57% in 2020. In March, he estimated that his revenues would increase from 34% to 37% in fiscal year 2021, which ends next January. Slack’s growth remains robust, but the bears believe growth in revenue may peak before making a profit. Slack expects his non-GAAP net loss to drop from $ 0.28 per share in 2020 to $ 0.19 – $ 0.21 in 2021, but his GAAP net losses – which include large compensation expenses to share base (SBC) – could increase further.
On a GAAP basis, Slack’s net loss increased from $ 138.9 million in 2019 to $ 568.4 million in 2020. SBC’s expenses as a percentage of revenues increased from 6% to 68% as the company increased its workforce and subsidized wages with a large stock bonus. This percentage is expected to decrease in 2020, but it highlights Slack’s dependence on stock bonuses as it attempts to grow with negative cash flows.
In addition, Microsoft recently revealed that its response to Slack, Teams, reached 75 million daily active users, up from 44 million in March. Slack has not updated its number of daily active users since last October (when it reached 12 million), and recently revealed that its platform was hosting a peak of 12.5 million concurrent users in late March.
Microsoft is bundling teams with its other Office 365 services, and this aggressive strategy – which takes advantage of its dominance of PC operating systems and productivity software – could hurt Slack. Microsoft would have been interested in buying Slack four years ago, but it clearly believes it can overwrite it instead.
Slack’s shares are also not cheap compared to those of its peers. The stock is trading at around 18 times the midpoint of its revenue forecasts for fiscal 2021, and its slowing in revenue growth, widening losses under GAAP and narrowing the staves makes it difficult to justify this bonus.
What do Slack’s bulls think?
Bulls believe Slack’s revenue growth will stabilize as it expands its larger customer base. He also recently expanded his user base by acquiring Stride and HipChat Cloud from Atlassian.
In the last quarter, the total number of paying Slack customers increased by 25% per year to reach 110,000. 893 of these customers generated more than $ 100,000 in annual recurring revenue, compared to 645 a year earlier. 47% of its revenues come from these large customers, compared to 41% last year.
Slack CEO Stewart Butterfield recently dismissed the idea that Microsoft was a serious threat in an interview with CNBC, noting that less than 30% of Microsoft Office 365 users are using teams. This percentage could increase, but it also suggests that there are still many companies that do not wish to be linked to the Microsoft ecosystem. In addition, the Slack platform is already integrated into most Microsoft Office applications.
Slack’s non-GAAP gross margin also increased last year, indicating that it still has pricing power, and its free cash flow – although negative – is improving. Consequently, Slack’s GAAP losses could eventually shrink as it gets rid of its dependence on stock bonuses. Slack still held $ 767 million in cash, cash equivalents and marketable securities at the end of 2020, without any debt – so Microsoft won’t be leaving the road anytime soon.
Last but not least, Slack remains an attractive takeover target for other companies. Slack’s valuation and enterprise value of $ 14 billion is a bit high, but cash-rich tech giants like Amazon, Cisco, and AlphabetGoogle – which offers all remote collaboration platforms – could still be interested.
So where will Slack be in five years?
I think the Bear vs. Slack case is slightly stronger than the Bull case. Slack’s CEO may publicly dismiss Microsoft Teams as a rival, but his filings with the SEC clearly point to Microsoft as his “main competitor.”
Slack’s revenue growth is likely to slow over the next five years, and it may find it hard to cut losses while expanding its staves. It could also be forced to issue debt securities or secondary shares to maintain its cash flow. These challenges, as well as the foamy valuation of Slack, could cause its stock to tread water and underperform other technological stocks over the next five years.