3 Reasons Why Slack Stock Can Start Working in 2020

With Slack (NYSE:WORK) having closed yesterday just above $22 per share, SLACK stock is now down nearly 50% from its post-Initial Public Offering high of $42. In just six months, Slack has gone from a promising software-as-a-service (SaaS) growth machine to one of the year’s biggest IPO busts.

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And now, folks are lining up to predict further troubles ahead for WORK stock in 2020. It’s not hard to see why. Microsoft (NASDAQ:MSFT) is looking to take the company’s market share. When a big tech giant decides to incorporate a small company’s whole reason for existence into an existing product, the small company has problems. Additionally,  Slack’s most recent earnings report included some worrisome signs. Already, it appears, competition is hitting the company badly.

That said, Slack is still growing its revenues at a dramatic clip. SLACK stock price has started to level off after months of steady declines. And SaaS stocks, as a category, are heating up again after the fall selloff. With that in mind, let’s take a look at the contrarian, bullish case for Slack.

Slack’s Revenue Growth Slowdown Isn’t As Bad As It Looks

Arguably the biggest concern about Slack right now is that its revenue growth is rapidly dropping. And that’s a fair point. Slack had been posting nearly triple-digit-percentage revenue growth around the time of its IPO. That fell to 60% during the most recently reported quarter. Based on Slack’s forward guidance, its revenue growth looks poised to dip to around 40% or so within the next year. That trend can also be confirmed by looking at the number of paid customers, which rose by just 30% year-over-year.

However, the company’s customer acquisition trends appear to be favorable. Slack has a net revenue retention rate of 134%, which is extremely good, even by software standards.

This means that customers are spending much more on Slack with every passing quarter as users utilize the platform more extensively and purchase additional services. Slack’s overall rate of new customer acquisition may continue to drop, but as long as existing customers keep spending more money on the company’s services, Slack’s operating results will look better and better.

Can Slack and Microsoft Co-Exist?

Also posing a threat to Slack stock is the closely-related problem that Microsoft Teams is stealing Slack’s thunder. Teams already has more daily active users than Slack. As of last month, Microsoft had more than 20 million daily active users, while Slack only has around 12 million. Additionally, a recent CNBC survey of tech leaders found that far more of them use Teams than Slack.

That is a clear – and even existential – threat to Slack. However, Slack isn’t necessarily toast. CEO Stewart Butterfield took direct aim at the analysts who were suggesting that Teams is killing of Slack. On the company’s most recent earnings conference call, Butterfield stated that:

Although Microsoft markets Teams (as) a Slack competitor and there’s no doubt this causes confusion in the marketplace, in practice these are different tools, used for different purposes and our customers achieve markedly different results. Just look at the weak engagement numbers that Microsoft themselves report and (the) much deeper level of engagement you see among Slack users.

The CEO noted that Microsoft is forcing many users to migrate to Slack from older systems, boosting its user numbers. But that doesn’t mean that its user engagement levels are strong. Butterfield concedes that Microsoft may even top 50 million Teams users in coming quarters, as more Skype for Business users are forced to use Teams for services such as internet telephony.

However, many of these users won’t be engaging with Teams like they would with Slack. To that end, it’s worth considering that many Microsoft Office users also are paid customers of Slack, suggesting that they can be used together.

Slack Doesn’t Need to Go It Alone

Some analysts have turned to portraying Microsoft and Slack as a David versus Goliath-type battle where Microsoft is the overwhelming favorite. That’s not an entirely inaccurate analogy. However, Slack could choose to sell itself.

The company would be a great takeover target for several reasons. For one, Slack essentially replaces  e-mail for a lot of firms. It’s a strong communications tool,and thus is of great interest to leading tech companies that want to stay in constant contact with their users. Additionally, Slack is designed to integrate easily with outside apps and software programs.  Slack’s prospectus note that:

Also unlike email, Slack was designed from the ground up to integrate with external software systems. Slack provides an easy way for users to share and aggregate information from other software, take action on notifications, and advance workflows in a multitude of third-party applications, over 1,500 of which are listed in the Slack App Directory.

Given Slack’s  natural connection with so many other leading tech companies’ platforms, it’s a natural bolt-on acquisition for a variety of larger tech players. In light of Microsoft’s increasingly threatening position atop the cloud universe, Slack would be a nice acquisition target for a challenger. Also, with the increasing value of big data, Slack likely can help large companies that have launched significant R&D efforts in data and AI.

The Bottom Line on WORK Stock

People are fed up with the poor results from the unicorn IPOs this year. So much so, in fact, that the SEC is investigating the trading of recent IPOs, centering on the opening day of action. Slack reached its all-time high of $42 per share on its first day of trading and fell  to $35 within a week. So, not surprisingly, Slack stock is one of the 2019 IPOs that the SEC is probing.

This is just another thing that will likely make investors less upbeat about Slack stock. With so much hatred toward unicorn stocks in general and Slack in particular, however, comes opportunity. It wouldn’t take much for traders to start buying WORK stock again.When a stock stops going down despite continuing bad news, that’s a notable development. With WORK stock appearing to have a solid technical bottom forming at $20, Slack should climb further

At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2019/12/3-reasons-why-slack-stock-can-start-working-in-2020/.

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