The near-term future for tech stocks may be seen in what happened to Slack Technologies (NYSE:WORK) after earnings recently. Slack stock tumbled 15% despite a strong earnings report from the company.
The numbers it reported for the quarter ending in April were outstanding. Revenue was up 50% year over year. The gross margin was 87%. The number of customers grew 28%. The company predicted growth will continue.
Still, $202 million in revenue on a stock worth $25 billion? Because Slack invests ahead of growth, as it should, there was a net loss of $75 million, 13 cents per share. July is expected to look much the same.
Never Good Enough
The pandemic caused people to demand an economic bailout. What they got was an investor bailout. TV analyst Jim Cramer called it “one of the greatest wealth transfers in history.”
Much of that money went into cloud technology, into companies like Slack. These companies can dramatically increase productivity. They reduce corporate costs. They create deflation, and long-term unemployment.
If these gains go into creating new work and new industries, it’s great. If it all goes into investor pockets, it’s self-defeating. That’s what Slack is signaling.
Slack CEO Stewart Butterfield was honest about this. A lot of companies rushed to Slack to cut their costs. But the general economy fell off a cliff, so Slack’s customers are hurting. Slack is being flexible about getting paid, but some customers may fail. Butterfield has withdrawn earnings guidance for the rest of the year.
This isn’t just a Slack story. It’s true across the board. It means expectations for tech earnings may not be met.
The Amazon Story
There is a floor under Slack. That floor is Amazon (NASDAQ:AMZN).
Along with its earnings release, Slack announced that Amazon has licensed Slack software for use by its employees. Slack, already an Amazon customer, will now use AWS’ Chime software for its video calling.
Amazon is under increasing pressure to climb “up the stack” in cloud, offering not just infrastructure or a platform, but applications. All the major cloud platforms are doing it. Applications are a lot more profitable than renting infrastructure.
Slack, meanwhile, is under pressure to have a deep-pockets partner. With Amazon worth $1.23 trillion, Slack’s $18 billion market cap would be seat-cushion money. Fully integrating Slack into Amazon, as the heart of a business application suite, could make Amazon a strong third player in the enterprise software space.
Just as Microsoft’s control over PC operating systems let it consolidate the applications market in the 1990’s, control over cloud resources may do the same in this decade.
The Bottom Line on Slack Stock
I don’t think tech companies can meet current earnings expectations in the near term.
No one can grow their top line when the underlying economy is crashing. The economic benefits of using technology mean many jobs won’t come back, even with full recovery.
In that environment, smaller software companies like Slack will gravitate to deep-pocket partners. The Cloud Czars will have their pick of the litter after the next tech wreck.
By integrating with Amazon, Slack assures itself a partner when music stops. But Amazon need not rush into a deal, because investors are currently funding Slack’s growth. Slack investors have a floor under their investment, but that floor is well beneath them.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and MSFT.