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Slack Or Zoom: Which Tech Stock Has A Higher Upside Potential?

support@smarteranalyst.com (Ben Mahaney)

Remote and virtual collaboration and communications has become the priority for businesses of all sizes as an essential tool to manage remote and virtual teams, says ReportLinker. It has found that the global Web & Video Conferencing SaaS market is expected to witness growth spike by 110.3% in the year 2020, with a whopping 72% of companies planning to shift a portion of their staff permanently to a work-from-home model.

Here we will discuss how Slack Technologies and Zoom Video have leveraged the spike in demand amid the pandemic and use the TipRanks’ Stock Comparison tool to see which stock offers a better investment opportunity.

This image has an empty alt attribute; its file name is Slack-vs-Zoom.png
This image has an empty alt attribute; its file name is Slack-vs-Zoom.png

Slack Technologies (WORK)

Slack reported better-than-anticipated revenue and earnings for fiscal 2021’s 2Q (ended July 31) thanks to a spike in remote communications due to COVID-19. However, the stock declined following the results as investors were anticipating much more elevated demand especially after companies like Zoom Video crushed analysts’ expectations with triple-digit revenue growth.

Moreover, a key metric—billings growth fell short of the Street’s expectations and slowed down compared to 1Q. Calculated billings grew 25% Y/Y in 2Q compared to 38% in 1Q. Slack cited $4 million of COVID-related concessions and preference for shorter contract duration as reasons for the slower billing growth.

Barclays analyst Raimo Lenschow lowered his price target for Slack to $31 from $38 while maintaining a Buy rating and stated that in the short-term Slack will "be in the penalty box as a high growth software stock at healthy valuation levels should not miss billings estimates,"

However, the analyst feels that the 25% growth in 2Q and signals that things are improving "show that we are close to the trough." (See WORK stock analysis on TipRanks)

Overall, Slack’s 2Q revenue rose 49% Y/Y to $215.9 million. Number of paid customers grew 30% Y/Y to over 130,000, with those paying over $1 million in annual recurring revenue rising 78% to 87. Also, paid customers for Slack Connect, a feature that allows inter-company collaboration, increased 160% to over 52,000. Slack delivered break-even adjusted EPS compared to an adjusted loss per share of $0.14 in fiscal 2020’s 2Q.

Slack expects revenue growth of 32% to 33% in 3Q and between 38% to 39% in fiscal 2021. In its quarterly SEC filing, Slack disclosed that it has experienced an increase in paid customer churn and a decrease in expansion within existing paid customers in the first six months of fiscal 2021 and expects these unfavorable trends to continue due to the pandemic.

There are concerns about growing competition from Microsoft’s Teams. In July, Slack filed a complaint against Microsoft with the European Commission, claiming that Microsoft, which offers its Teams communication app in its Office 365 productivity suite, engaged in anticompetitive behavior.

Slack stock advanced 14.3% year-to-date as of Sept. 13 and has a further upside potential of 25.3% ahead with an average analyst price target of $32.19. The stock scores a Moderate Buy consensus from the Street based on 9 Buys, 7 Holds and 2 Sells.

This image has an empty alt attribute; its file name is Slack.png
This image has an empty alt attribute; its file name is Slack.png

Zoom Video Communications (ZM)

Zoom Video is experiencing unimaginable growth as organizations, schools and individuals around the world are adopting its videoconferencing platform to stay connected amid the pandemic. Several analysts significantly raised their price target for Zoom following its staggering growth in 2Q, including Merrill Lynch analyst Nikolay Beliov, who stated “The results confirm our view that Zoom is both a ‘vaccine’ and ‘vitamin’ as Covid-19 has permanently shifted the world to a hybrid-work environment and clearly elevated the awareness of cloud communications and video conferencing.”

Beliov reiterated a Buy rating and raised his price target to $475 from $260 as Zoom’s 2Q revenue in fiscal 2021 jumped 355% Y/Y to $663.5 million and adjusted EPS rose sharply to $0.92 compared to $0.08 in fiscal 2020’s 2Q. Zoom ended the quarter with 370,200 customers having over 10 employees, reflecting a 458% Y/Y rise. Plus, the number of customers generating more than $100,000 in trailing twelve months revenue grew 112% to 988.

Security lapses and outages did cause Zoom some trouble and benefited rivals. However, the company swiftly addressed several concerns and even in the 2Q conference call, founder and CEO Eric Yuan assured that the company is going to “double down on privacy and security”.

The company expects the explosive growth to continue and has predicted 3Q revenue growth between 311% to 314% and fiscal 2021 growth between 281% to 284%.

On September 14, Baird analyst William Power reiterated his Buy rating and a price target of $465 for Zoom as he believes that the company is still in the early innings of creating a significant global cloud communications platform.

The analyst said that the penetration of Zoom’s core markets remains very early and feels that investors have narrowly focused on the company’s historical addressable market rather than seeing its uses in telecom, healthcare, education, events, and other markets. (See  ZM stock analysis on TipRanks)

Zoom stock has surged by a stellar 493% year-to-date and the average analyst price target of $408 indicates a very modest upside of 1.1% in the coming months. The Street is cautiously optimistic about the stock with 10 Buys, 13 Holds, and 1 Sell rating adding to a Moderate Buy consensus.

This image has an empty alt attribute; its file name is Zoom.png
This image has an empty alt attribute; its file name is Zoom.png

The better buy

Zoom Video has certainly delivered way better numbers than Slack in the recent quarter and is well-positioned to cater to pandemic-led demand and other growth prospects when the pandemic fades. However, high valuation and a significant YTD rise in the stock do not leave room for much upside in the coming months as indicated by the average analyst price target. For investors looking for more upside in the coming months, right now Slack seems to be preferable.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment

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