Slack (NYSE:WORK) has had a rough go of things since its June IPO. Except for a few brief respites, it’s been pretty much all downhill for WORK stock since then. The company released second quarter earnings on Sept. 4 — its inaugural earnings report as a publicly traded company — and the downward spiral continue, despite beating on both earnings and revenue.
After falling 5.4% drop on Thursday and less than 1% again on Friday (with WORK closing below $22 a share), Slack stock has lost more than 43% of its value so far in 2019.
Microsoft is a Problem
Slack is a workplace collaboration tool, with features like chat, voice and video calls, and file sharing. The company describes its product as a hub that replaces e-mail to “support the way people naturally work together, so you can collaborate with people online as efficiently as you do face-to-face.”
During its IPO, Slack said it had 10 million active daily users. However, Microsoft (NASDAQ:MSFT) has a competing product called Teams and in July the company announced it had 13 million daily active users –making it more popular than Slack. Microsoft has the advantage of including Teams as part of its Office 365 subscription service, where Slack users have to pay specifically for the service (or use the free version). And with 200 million active monthly users for Office 365, Microsoft could easily see significant Teams growth among its existing client base.
Slack’s CEO points to “disruptive innovation” a term coined by Harvard Business School professor Clayton Christensen. Under his theory, by resonating with customers — focusing on quality and the user experience — Slack can make inroads against a huge company like Microsoft that makes many complex products and charges a premium price for them.
Not everyone is buying the idea, though, at least as it applies to Slack and Microsoft.
Weak Q3 Guidance
In September, Slack reported Q2 earnings that handily beat expectations: revenue of $145 million (versus the predicted $140.72 million) and a loss of 14 cents per share (versus the expected 18 cents). Slack said the Q2 numbers showed 58% revenue growth, and Slack stock was up immediately after the report. But it quickly changed direction, dropping nearly 20% in the two days after.
The reason? Investors remain worried about Microsoft, despite Slack management’s dismissal of the much-larger competitor. And the company’s Q3 revenue guidance for $154 million to $156 million was weaker than analysts had been hoping for. That would represent a revenue growth rate of 46% to 48%, showing slowing sales growth.
Legal Issues Adding to the Uncertainty
Making the future even murkier for WORK stock is an ongoing series of legal suits and investigations. These allege that Slack misled investors in its IPO, violating federal security laws. At this point, there are at least a half dozen shareholder lawsuits filed against Slack, many of those launched in the days after the Q2 earnings report.
The circling lawyers have investors worried, with some joining the pile-on.
Bottom Line on Slack Stock
Analysts have a mixed view of Slack stock, and that’s understandable. Slack has only recently become a publicly traded company, so there’s not a lot of data to work with. There’s been a sense that the company could take off — it was one of the most hotly anticipated public offerings of 2019 for a reason — but there are growing concerns about the competitive threat that Microsoft poses. The path to profitability seems distant and unclear. Growth is already slowing. Hanging over everything is the series of legal investigations.
There is some long-term optimism among analysts, with an average 12-month price target of $34.46 among those tracked by TipRanks. But with WORK stock’s miserable performance over the past six months and the week guidance for Q3, now does not feel like the time to buy.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.