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Slack IPO: Should You or Shouldn’t You Invest?

Will Ashworth

Slack Technologies is scheduled to do a direct listing on the New York Stock Exchange June 20 under the ticker WORK. Users of its cloud-based workplace messaging app are likely to be interested in the Slack IPO.

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If you’re looking to pick up some Slack stock, here are what I believe to be the pros and cons of owning its shares.

The Pros of Owing Slack Stock

One of the things that Slack has going for it is its familiarity. I’m no techie, and yet even I’ve used Slack for some of my writing engagements.

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I don’t see the big deal about its platform, but given more than 500,000 organizations use Slack’s free subscription plan and another 95,000 companies including 65 from the Fortune 100 use its paid subscription, the evidence suggests that it’s gained plenty of traction with business people around the world.

Amazingly, during a single week in January, more than a billion messages were sent over the Slack platform.

Slack’s paid subscription charges a monthly or annual fee based on the number of users. In the past three years, annual revenues grew from $105.2 million in fiscal 2017 to $220.5 million in 2018, and $400.6 million in 2019, a compound annual growth rate of 95%.

To assess how it’s doing with large businesses, Slack keeps track of the number of customers paying more than $100,000 in annual recurring revenue or ARR.

As of April 30, it had 645 large customers, which accounted for 43% of its revenue. Two years earlier at the end of fiscal 2017, it had just 135 customers paying more than $100,000 in ARR, a compound annual growth rate of 100.4%.

So, it’s easy to see that Slack is growing at a fast pace, which is an attractive feature of the Slack IPO.

If you’re a glass-half-full type of a person it’s hard not to consider what would happen were Slack to convert a large chunk of the 500,000 organizations using its free version. The free version is much less robust than the paid subscription, which allows customers to integrate third-party and internally-developed apps on the Slack platform.

In fiscal 2019, Slack had calculated billions [revenue plus deferred revenue] of $517.0 million from 88,000 paying customers, an average of $5,875 per customer. Should Slack convert 10% of the 500,000 organizations using its free version, we’re looking at an additional $294 million in annual revenue or more than double its calculated billings this past year.

Estimates in recent months put Slack’s valuation at as high as $17 billion. That’s 42 times 2019 revenue. If it adds $294 million in annual revenue from the example above, the company would be worth an additional $12 billion.

Any reasonable amount of growth could send Slack shares much higher after listing June 20.

The Cons of Buying Slack IPO Stock

The three biggest problems I see with Slack’s IPO are as follows.

It’s not raising any proceeds: Like Spotify (NYSE:SPOT), the Slack IPO is merely providing existing investors with a conduit for selling shares — up to 118.4 million shares according to its amended S-1 — not issuing new shares to raise additional capital to finance further growth.

Of course, when you have more than $800 million in cash and marketable securities and no debt, you don’t need to raise new capital.  

If you bought Spotify IPO shares in April 2018 and are still holding, you’ve made less than 6% on your investment in 14 months. Is Slack ready to go down the same path?

It loses money: Like many of the tech IPOs in 2019, Slack doesn’t make money.

Over the past three fiscal years, it’s lost a total of $447 million from its operations. In the three months ended April 30, it had an operating loss of $38.4 million, 46% higher than a year earlier. As a percentage of revenue, that’s an operating margin of -28.5%, down 400 basis points over the previous year.

As Slack states in its S-1, it has a history of net losses, operating expenses will increase in the future, and it might not be able to achieve profitability in the future.

I fail to see why anyone other than venture capital investors would buy shares in an IPO company that loses money. Yet people do it all the time.

It could get stomped on: Lastly, and likely the most significant concern you ought to have with the Slack IPO is Microsoft (NASDAQ:MSFT). If it wants to own the corporate messaging and communications space, it will take it without asking.

While it’s possible Microsoft could buy Slack like it did LinkedIn and then integrate it into the company ecosystem, it’s just likely that it could develop its own platform using LinkedIn.

I guess we will see.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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