Slack Technologies (NYSE:WORK) hit a Relative Strength Index (RSI) reading of 29.99 on Jan. 27, as Slack stock has given back more than 45% of its post-IPO price.
With an RSI well below the S&P 500’s of 49.2 (anything below 30 is said to be oversold), Slack stock might look like a buy here, but that assertion is debatable.
If you bought Slack shares in its June IPO and you’re still holding, you’re down almost 23% over the past seven months, an annualized return of -39%.
That hurts. Especially given Slack’s stock gained 48.5% on its first day of trading and it’s been downhill ever since. Slack might not be worth $42 a share (52-week high) but $20 seems like a cruel joke.
According to Investing.com, out of the 19 analysts with coverage of the company’s stock, nine rate it a buy, eight are neutral, and two have it as a sell. Considering how far it’s fallen, that’s relatively healthy support.
As for its 12-month target price, the analysts have a high of $41, a low of $12, and an average of $27.29, providing investors with a potential upside of 36% over the next 12 months.
In early December, Slack reported strong subscription growth beating analyst estimates on both the top- and bottom-line. DA Davidson & Co. analyst Rishi Jaluria believes the company is slowly starting to find its footing after allowing users to continue to use other apps such as Google Drive without having to leave Slack’s platform.
Slack ended the third quarter with more than 105,000 paid users, up 30% year over year. Also of note, it added 101 paid customers in the quarter who generate more than $100,000 in annual recurring revenue for the company and more than 50 that bring in $1 million or more annually.
Overall, revenues grew 60% year over year to $168.7 million. Slack finished the quarter with more than 12 million daily active users.
As for the entire fiscal year, it expects revenues of $622 million at the midpoint of its guidance and a non-GAAP loss of 31.5 cents. In addition, it will use approximately $82.5 million in free cash flow in fiscal 2020, down from $97.2 million in fiscal 2019.
It’s definitely on a pathway to profitability.
It’s a Lousy Investment
Slack’s market capitalization is currently $11.3 billion. That’s 19.3 times sales despite falling 48% from its first-day return. And it doesn’t make money.
Back in June just days before Slack went public, I explored the pros and cons of buying its IPO shares. The big positive was and still is, the amount of growth it’s experiencing.
The big negative was that it could be stomped on by Microsoft (NASDAQ:MSFT). What I failed to mention was that Microsoft Teams, not LinkedIn, would be the platform doing the stomping, something I reflected upon in November.
Microsoft currently has a price-to-sales ratio of 9.7, half Slack’s.
Sure, it might not be growing revenues by 60% a quarter, but given it generated $39 billion in free cash flow over the trailing 12 months, Microsoft’s 14% sales growth in Q1 2020 is actually very healthy.
As I said in November. If Microsoft CEO Satya Natella decides to focus on Microsoft Teams, Slack’s going to be collateral damage. It’s that simple.
The Bottom Line on Slack Stock
I wouldn’t classify Slack stock as a lousy investment. I would, however, view it as a much riskier bet than Microsoft. Trading near its all-time low, any bad news in the months ahead will likely send its share price into the teens.
However, if you’re an aggressive investor, and aren’t using this money for your kid’s education, I don’t see a problem investing in its stock at current prices.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
