Back in late January, I wrote on InvestorPlace.com that, because of its rich valuation and huge competition headwinds, Slack (NYSE:WORK) stock wasn’t worth buying above $20. Over the next six weeks, that thesis looked abysmally wrong. WORK stock never dropped below $20.
Instead, from late January to mid-March, it soared from narrowly above $20, to almost $30, on the idea that the rapidly spreading coronavirus pandemic would promote greater demand for Slack’s communication services (which enable employees to work-from-home).
Then, on March 13, my original thesis started to make sense again.
Slack reported fourth-quarter numbers that, while strong, also included a first-quarter and full-year guide that weren’t as strong. Shares dropped about 20% in response… to levels well below $20.
It may actually be time to buy the dip in Slack. The virtualization mega-trend makes this stock a long-term winner. The valuation is now far more appropriate. And the company is weathering the coronavirus storm quite well.
To be clear, I’m not advocating buying the dip with both hands. Rather, be patient. Wait to see how the coronavirus situation plays out, and observe improvements on that front before aggressively buying WORK stock. But, once such improvements emerge, this stock could start taking off back towards $20-plus levels.
Why Slack Stock Looks Good for Long-Term Investors
Long term, there is a huge virtualization trend at play which will propel Slack stock higher over the next several years.
The idea behind virtualization is simple. Take a physical process, and virtualize it so that consumers can do it from the comfort of their own homes.
Before the coronavirus outbreak, the virtualization trend already had a ton of momentum. That’s because consumers simply enjoy staying home and doing things with elevated convenience. But, after the coronavirus outbreak, the trend has gained more momentum than ever before, as consumers are increasingly opting for at-home services because they don’t want to risk getting sick.
Of course, coronavirus hysteria won’t stick around forever. But it will accelerate the adoption of virtualization services like Slack, and my thinking is that once consumers jump on these services, they will like them, and become long term customers.
Long term, then, I see Slack as being in the early days of a huge growth narrative wherein consumers far and wide adopt virtualization services, like Slack’s communications platform.
There is plenty of competition in this space, so Slack consequently won’t dominate it (see Microsoft (NASDAQ:MSFT) and its
“Teams” app). But, the virtualized enterprise communications space is big enough for several players, and it certainly appears given its current customer list and strong brand equity that Slack will be one of those players.
If so, this company will likely sustain 20%-plus revenue growth for a lot longer, the likes of which should drive WORK stock higher.
When to Buy Slack?
While I think Slack does offer compelling long-term upside from current levels, I also acknowledge that near-term risks surrounding the stock are high.
Namely, the coronavirus outbreak in the U.S. and throughout Europe is still young. Things will get worse before they get better on that front. Before, that wasn’t a bad thing for Slack, since investors saw the stock as a hedge against the virus. But, in the wake of a disappointing earnings report and a 20% plunge, it’s tough to see investors continuing to treat Slack stock as a “safe” hedge.
So, I think that as long as the coronavirus outbreak gets worse in America and across the globe, then the stock will struggle for gains.
But, once the outbreak starts to slow and the outlook for a recovery starts to gain visibility, this stock will take off. It’s a long-term winner, trading at all-time lows, with a ton of runway to deliver outstanding numbers over the next few quarters.
Big picture — wait for coronavirus headwinds to clear, then buy the dip.
Bottom Line on WORK Stock
Slack is a good company. Slack stock just got overvalued because investors overstated the positive impacts of COVID-19 on the company’s business.
The stock is now correcting lower. The valuation is now more tangible. And the company is still supported by robust long-term growth prospects.
So, once coronavirus headwinds clear and the outlook for a recovery improves, buy this dip in WORK stock.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold any positions in any of the aforementioned securities.