Slack (NASDAQ:WORK) looked as if it were ready to rip after reporting earnings in early December. And while Slack stock did trade higher off those numbers, it couldn’t break out over resistance.
Unfortunately, that’s got bulls playing defense rather than offense, and leaves a must-hold level of support in play. A break below support could send the stock tumbling into no man’s land, while holding support gives investors a chance to regroup and possibly retest resistance.
Some investors are surely saying, “But Slack stock beat on earnings and revenue. What gives?”
The stock market is a forward-looking mechanism. In other words, it doesn’t matter what the company did, so much as what it’s going to do. A post-earnings decline is the market’s way of saying that it’s disappointed in the quarter. Will the market turn out to be wrong?
Let’s look at the charts, first.
Trading Slack Stock
Admittedly, the daily chart above of Slack stock is a bit congested with some of my additions. But it highlights various trends that are still in play, as well as key levels that apply to both longs and shorts.
After pricing its IPO at $26, WORK stock opened sharply higher, above $38. Its $42 high hit on day one of going public remains its high now as Slack has been trapped in a prolonged downtrend.
The stock’s post-earnings reversal was very eye-catching to traders (orange arrow). As if a reversal in itself wasn’t impressive enough, Slack stock was also able to close over its 20-day and 50-day moving averages. More importantly, though, the stock closed the day at $22.78, just shy of $23.
The $23 level has proven significant in recent months, while downtrend resistance (blue line) was near this mark too. Clearing both would have been a very bullish technical development.
Slack stock flirted with $23 a few times, then ultimately failed to break through. It dropped below its 20-day and 50-day moving averages and lost its uptrend support mark (purple line). That took all the air out of the stock and just leaves key support as bulls’ lone technical catalyst.
If WORK stock takes out its December low at $20.20, then the $19.50 area is on watch. That was support from October and November, and should it fail to hold, Slack stock could really lose its footing.
The bottom line? The technical setup for Slack went from potentially great to possibly horrible. For bulls to get back in control, they need to get a close over downtrend resistance, then $23. Until then, holding key support is a must.
Sizing up Slack Stock
So the technicals are less than ideal, but what about the fundamentals? After all, just two weeks ago Slack stock reported better-than-expected quarterly results.
A loss of two cents per share was six cents ahead of estimates, while revenue of $168.73 million grew about 60% year-over-year and topped expectations by more than $12.5 million. Unfortunately, management’s fourth-quarter outlook was only in-line with analysts’ expectations.
Slack makes a solid product and has strong growth. However, despite the ongoing decline, many still consider it richly valued. With an $11.4 billion market cap and expected full-year sales of $621 million, that’s a reasonable argument. Particularly when the company is not free cash flow positive or profitable.
Forecasts also do not predict that Slack will be profitable in fiscal 2021 either (next year), while revenues should hit $855 million. While that would mark impressive growth, it still leaves the stock richly valued.
I think investors would be willing to overlook in-line guidance and a high valuation if it weren’t for Microsoft’s (NASDAQ:MSFT) presence.
Microsoft recently said its Teams platform had 20 million daily active users (DAUs). For slack, that number stood at 12 million as of October, although it’s likely increased since. This has caused an issue among investors, as management noted on the conference call:
“Although Microsoft markets teams has 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 reported about Teams and the much deeper level of engagement you see among Slack users.”
Management further underscored that 70% of its 50 largest customers are Microsoft Office users as well. Meaning that, despite having access to Teams, they opt for Slack instead. Reasonable or not, the market isn’t willing to overlook Microsoft’s presence when it comes to Slack stock. At least for now.
Instead, investors who like the company based on its product and growth should consider following the charts. That may allow for a better entry price and help highlight if and when bulls regain some momentum.