If you think the teleworking trend is coming to an end, feel free to bet against Slack Technologies (NYSE:WORK) stock. But do so at your own peril.
Slack has quickly become a must-have application for many companies, with around 638,000 firms around the world using Slack’s platforms as of December.
And that was before the novel coronavirus pandemic made face-to-face collaboration virtually impossible.
Clearly, there’s a need for business tools that keep groups talking even when they’re not in the same room. Slack is here to stay, despite some recent challenges that pushed the stock price down.
WORK Stock at a Glance
No doubt, Slack is having a tough month. WORK stock is down around 20% so far in September, bringing its year-to-date gains to 18%. That’s solid, but not spectacular.
Second-quarter earnings released this month told the story. Revenue and earnings were better than expected, coming in at $215.9 million and $0.00 per share. Analysts had expected revenue of $209.1 million and a loss of 3 cents per share.
The company reported a total of 130,000 paid customers. That represents a 30% increase from the last year. Slack reported that its net dollar retention rate was 125%, meaning that clients were spending 25% more on Slack products than last year, as they added more users or services to their accounts.
Another positive was the growth of Slack Connect, which allows users to collaborate in Slack channels with people in other organizations. That feature will help companies transition away from email and keep more customers working inside the Slack platform, where they can create private and public channels, send direct messages, share documents and have video conferences.
Slack says it had more than 380,000 endpoint users on Slack Connect at the end of the second quarter, which reflects a 200% year-over-year increase. The platform has 52,000 paid customers, which is an increase of 160%.
“Connect provides a very rare combination in enterprise software, a giant leap forward in both end-user experience and security compliance, where, so often, customers are asked to trade off one for the other,” CEO Stewart Butterfield told analysts in a conference call. “We can provide both.”
Slow Growth in Billings
The biggest headwind for Slack in the second quarter was its slower-than-expected growth in calculated billings. Calculated billings is a growth sales metric that includes changes in deferred revenue.
For the second quarter, Slack reported billings of $218 million that represented a 25% increase year over year. However, that was down from 52% growth in the prior year.
CFO Allen Shim says that billings took a $4 million hit from coronavirus-related concessions to customers who were struggling financially. The company also had “contract duration-related” headwinds during the quarter that brought total concessions for the quarter to $11 million.
Even so, it’s a red flag for investors. Slack showed calculated billings grow 102% in 2018 and by 97% in 2019. It makes some investors pause when that number falls to 25%, and WORK stock fell by 20% after its earnings report.
The Bottom Line
Slack hasn’t had the explosive growth of some video communications stocks during the Covid-19 pandemic, but the company was considered an essential need to hundreds of thousands of businesses that used it, even before the pandemic.
Now that working remotely is in vogue — and probably will continue to be even after a vaccine is released — it will be even more important for companies to use networking and collaboration software.
There’s plenty of competition for Slack in the virtual work environment, but there’s also tremendous opportunity for growth. While Slack has “only” 130,000 paid customers, there are more than 3 million small businesses in the U.S.
Slack is being aggressive in offering free trials of its products and then transitioning those into paid accounts. I’m expecting more profitability from WORK stock in the coming quarters.
WORK stock has a “B” ranking right now in my Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
