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Buy Slack (WORK) Stock Before Earnings Despite Post-IPO Disappointment?

Benjamin Rains

Shares of newly public Slack Technologies, Inc. WORK have tumbled since its June IPO. It is not unusual for somewhat hyped tech companies to suffer in the early days, just look at Facebook FB. Therefore, the question investors need to ask themselves is should they consider buying some WORK shares before it reports its Q2 financial results on Wednesday, September 4?

The Basics

Slack is a work communication-focused online platform that it calls a “collaboration hub that brings the right people, information, and tools together to get work done.” The San Francisco-based company also lives in the broader cloud-computing/CRM world and hopes to attract more paying business clients through its apps and “robust” API.

Early on, however, Wall Street and investors seem worried that Slack will find it too hard to attract paid subscriptions in a work-place communication industry dominated by global tech titans such as Microsoft MSFT and Google GOOGL.

Slack, which went public with a direct listing on June 20, boasts over 10 million daily active users across more than 150 countries. The firm also claims that 65 of the Fortune 100 use its platform, including the likes of Starbucks SBUX and Target TGT.

Overall, roughly 500,000 organizations reportedly use Slack’s free subscription plan. But Wall Street cares much more about its paid customers, of which it currently claims over 95,000. Last quarter, Slack did see its paid customer greater than $100,000 in annual recurring revenue jump 84% from the year-ago period to just 645.

As we mentioned at the top, shares of Slack have fallen since their late June IPO. WORK stock opened its first day of trading at $38.50 a share and managed to stay above that price for only the first day of trading. Since then, Slack stock has fallen roughly 22% to close regular trading Thursday at $29.95.

WORK stock is not alone, with both Uber UBER and Lyft LYFT having failed to live up to the hype so far. On the other hand, Pinterest PINS and Beyond Meat BYND have both surged since going public earlier this year.

 

 

 

 

Q2 Outlook & Beyond

Before we look ahead, investors need to understand what happened last quarter. Slack on June 10 reported first-quart fiscal 2020 revenue of $134.8 million. This marked a 67% jump from the prior-year quarter. Meanwhile, the firm posted a GAPP net loss of $0.26 a share and an adjusted net loss of $0.23.

Slack executives expect second-quarter revenue to climb between 51% to 53%, with mid-point guidance at $140 million. Our current Zacks Consensus Estimates, which is based on five total analyst estimates, project WORK will post sales of $140.6 million.

Peeking further ahead, the firm’s full-year fiscal 2020 revenue is expected to jump 49.4% to hit $598.5 million. This comes in at the high-end of Slack’s guidance of between $590 million to $600 million. WORK’s fiscal 2021 revenue is then projected to climb roughly 38% higher to reach $825.8 million.

At the bottom end of the income statement, Slack is projected to post an adjusted quarterly loss of $0.19 a share this quarter, which would mark an improvement against last quarter’s loss. The tech firm is then projected to post an adjusted full-year fiscal 2020 loss of $0.41 per share. This would also come in on the more optimistic end of Slack’s own forecast that called for a net loss per share between $0.44 and $0.41. In 2021, Slack is expected to post a much smaller loss, with our current EPS projection at -$0.25.

Bottom Line

Slack is scheduled to report its Q2 fiscal 2020 financial results after the closing bell on Wednesday, September 4. The company clearly has some positive growth metrics, and Wall Street likely won’t care that its not profitable. Not only because it is a young tech company focused on expansion, but also since its bottom-line appears to be headed in the right direction.

With Slack down so big since its IPO, it’s not too hard to imagine a post-earnings pop, especially if the company provides impressive guidance or blows away estimates. Therefore, investors who can handle some risk might consider taking a small bite out of Slack stock heading into earnings.

In the long run though, Slack will have to prove it can convert its free users into paid subscribers, which is no easy task given the amount of work-focused digital communication platforms already entrenched throughout the U.S. and around the world. Plus, estimates already call for the company’s top-line growth to slow down significantly next year.     

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