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Slack Stock Looks Appealing Close to $25

Communications innovator Slack dropped recently, making today a good entry point

It’s been a confusing month for software firm Slack Technologies (NYSE:WORK). The communication platform saw its share price rise exponentially on news that International Business Machines (NYSE:IBM) was planning to use Slack. But shares later gave up some of those gains when investors realized that the tech mogul had already been using the platform.

Source: Sundry Photography / Shutterstock.com

Slack stock popped once again on news that Uber (NYSE:UBER) was rolling out the platform among its employees, but shares are still well below the $37.22 they were fetching near their Wall Street debut.

So is the company a buy at $26 per share? Here’s a look at the case for and against Slack stock. 

Making Connections, Growing Margins

There’s no doubt about the fact that Slack has been building its resume with several high-profile clients. IBM has been the biggest news as the tech firm is not only Slack’s largest customer, but it proves that the platform can scale up to serve big-wigs like Big Blue. CEO Steward Butterfield said as much when IBM announced that the platform would be accessible to all 350,000 of its employees. 

“Going wall to wall in IBM — it’s basically the maximum scale that there is, so we now know that Slack will work for literally the largest organizations in the world,” Butterfield said.

But IBM isn’t the only big partnership on Slack’s books lately. Ride-hailing Uber also contracted the firm to connect its 38,000 employees. The Uber deal is a big one for Slack, especially considering Uber said it didn’t believe the platform would be able to meet its needs just a few years ago. 

Last December, Slack also inked a deal with SiriusXM (NYSE:SIRI) to help the firm connect its employees around the country. 

Big partnerships like these are important for a few reasons. The most obvious is revenue. Slack needs big contracts like these to make money. But these deals also legitimize the firm’s business, giving the firm much-needed clout that will help it compete.

Another reason to like Slack is the fact that the firm’s software-as-a-service business is high margin. Slack’s streamlined business operates efficiently, allowing the firm to deliver impressive gross margin figures that come in ahead of its competitors. Slack’s gross profit margin came in at 86.3%, significantly higher than Microsoft’s (NASDAQ:MSFT) 67.7% or Cisco’s (NASDAQ:CSCO) 63.9%.

Tough Competition

However, it’s not all roses when it comes to Slack stock. Competition is one of the biggest reasons investors might want to consider staying on the sidelines — namely competition from Microsoft. While Slack has certainly proven that it’s capable of handling big-time accounts with its IBM partnership, the firm may not get the chance to do so very often.

That’s because Microsoft’s Teams product is a direct competitor. That’s problematic because it means Slack generally appeals only to organizations that aren’t using Microsoft’s suite of services, making its potential customers pool much smaller.

Plus, competing against a massive tech firm like Microsoft is tricky. Microsoft has more funding and already has a good reputation among its many clients.

Limited Growth

The other issue that Slack is facing is a limited growth runway. As it stands, Slack only offers one product. Granted, its proven that its communications network is powerful and scalable, but that does limit growth prospects. Unless the firm is able to develop a suite of services that it could use to get more out of existing customers, it’s long-term growth story is stunted.

With that said, there are some who believe Slack will eventually get acquired by a larger tech firm, hoping to add Slack’s platform to its own portfolio. Buying a stock on takeover speculation isn’t a great strategy, but it’s worth noting. 

The Bottom Line on Slack Stock

Slack stock has gotten caught up in the market’s selloff this week, losing more than 5% on Tuesday alone. This makes for a good entry point for those who believe in Slack’s future. At just under $27 per share, I’d say Slack’s potential has already been priced in.

However with the stock making its way to $25, it’s starting to look far more attractive. 

Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlaceBenzinga, Yahoo Finance and CCN. As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/slack-stock-looks-appealing-close-to-25/.

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