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Morgan Stanley downgrades Slack on 'fading' position among peers

Morgan Stanley downgraded Slack due to its fading position in an intensifying landscape, according data from a proprietary survey, noting that Slack is challenged in proving its differentiation from rivals such as Microsoft Teams and Zoom. The Final Round panel breaks down the details

Video Transcript

JEN ROGERS: --now, and one name I want to call out is Slack. This is our Call of the Day. Morgan Stanley actually downgrading Slack to underweight on a fading position in the CIO survey. And I thought this-- just the survey in here, this data, these are people that actually make the decisions about what you are going to use to communicate at work, who you and what you're going to be on for email, what property are you going to be talking to people on.

Seana Smith, I want to bring you in here, because Slack, it does not look-- if you look at these charts, it's not a great position to be in. Because they kind of call out that we all thought work from home, this is great for Slack. They're going to get a ton of uptick. But they're making the case that they needed a longer runway to differentiate themselves from names like Microsoft Teams.

And now that everyone just had to grab kind of what was around them, a lot of people got onto Teams. And it's going to be hard for Slack to make the case now. Do you think that Morgan Stanley made a solid argument here?

SEANA SMITH: Yeah, I think they did. And I also think that this is something that we have mentioned, maybe not exactly what they tied to Slack, but really in this space. Because when you think about how many players there are, it's not just Slack, and it's not just Microsoft Teams. You're also talking about Zoom. You're also talking about Google Meet.

And the products, clearly, there are differentiating factors between each. But largely speaking, they effectively do a similar thing. They enable people to communicate in a very, very easy way, in a very, very short amount of time, when they are not sitting right next to each other. So clearly, these-- all four of these names would have benefited from this work from home trade.

But I think Morgan Stanley is digging a little bit deeper here. And one of the things that the analyst Keith Weiss called out, which I think made a lot of sense, was that he was increasingly cautious-- those were the exact two words that he used-- just about Slack's ability here to convert the free users to pay users.

And Jen, it was exactly what you were saying. It was just about the fact that Slack didn't have enough time to pitch their product, that when this whole work from home, when the pandemic hit, there wasn't enough time for them to get their name out there to really convey as to why they are so different from some of the other platforms out there.

And when you compare it to a name like Microsoft Teams for an example, they have more than 270 million-- this was in the note-- 270 million paid Office 365 users. So that's its built-in user base, which clearly gives Microsoft Teams a competitive advantage when you're in this type of situation.

And so, because of that, Morgan Stanley here making the argument-- and I think it makes a lot of sense-- that Microsoft is going to continue to capture the majority of the market. It's going to force Slack here to split the rest and to split that minority position with Google and with Zoom. And I don't see that really changing anytime soon because of all of the, I guess, everything that's at play at this point.

And because of that, I mean, the stock is already up 20% in the past month. They also brought out some of those valuation concerns here, now saying that Slack trades at 17 times its fiscal year 2021 sales. So when you see where it's priced relative to some of its future earnings growth and its ability here to convert their free users into paid users, I think that there is reason to have a little bit of pause and a little bit of hesitation when it comes to Slack at this point.

MELODY HAHM: A couple of things here. I think, Seana, you made a great point of that conversion issue. I also think there are two different audiences, right? So Jen, you rightfully and aptly mentioned that this is for CIOs that were surveyed, the people who actually have the dollars, have the budgets, to invest in these things.

I can tell you that individuals, employees, love Slack, right? This has been a platform of choice, even if their teams and their companies use Microsoft Teams. I have heard many people complain, saying they wish they were part of the Slack ecosystem.

So of course you can set up a free account. You can join some random group channel. But at the same time, if you're not actually incentivized to be there, if you're not being given this platform where all of that collaboration is happening, you're not going to go out on a limb and do that yourself.

Second point, I do feel as though the Morgan Stanley note, one line that really caught my eye is, Slack is not the poster child for rapid and viral adoption within an organization. Essentially, it's not a sexy business. It's not something that people are going to run at, even if they feel like it's a value add, because there are alternatives, right? You can cobble together other sorts of situations.

And of course, we talked about Zoom Utopia, that huge sort of splash in conference that Zoom had where they were promising that they will offer a full suite of offerings that we had questioned, right, ahead of time, saying, when will Zoom actually enter Slack's space and really infringe on their sort of domain?

I do feel as though I'm surprised that Slack hasn't done the same, right? Why hasn't Slack been more aggressive with the video calls, with the group collaboration calls? And I know that a lot of us actually have used the feature before where we say we're on a call, right? Like, we use that as our away message. But at the same time, that hasn't been widely adopted to the point where people see Slack as a destination to actually hop on the phone, hop on a video call.

And then the final point I wanted to make is just this freemium model, right? I can make the argument, actually, that Slack's free model and free structure is pretty good. I say this because, actually, I know several people who don't pay for the service.

And I kind of checked out what is so different from their model, right, than the one that we're using. Essentially the only thing that is different is that you are not able to save individual DMs. All the kind of pass logs and the historical data of my conversation with you, Jen, or Dan or Seana, it disappears. It renews every day. But all the group channels are intact.

And then finally, if you think about it, the people who find it most useful to have those group channels in the first place are coders, are software engineers, who can actually get down and dirty and really do some complicated communication. If we're just texting memes to each other, Slack is not a vital tool. So those are some of the takeaways here.

JEN ROGERS: Who's just doing memes to each other? I also-- I did find it interesting to have confirmation that Facebook Workplace is not getting traction at all in the CIO survey in here anywhere. That is our call of the day on Slack. Meanwhile, Slack shares right now are off more than 6%.