Why Slack Stock Risks Another Round of Sharp Selling

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Weak bookings in the quarter sent shares of Slack Technologies (NYSE:WORK) sharply lower last week. After the dip, the stock is less expensive but not enough to attract value investors. Per Stock Rover, “Slack Technologies operates Slack, a software-as-a-service platform that brings together people, applications, and data. The platform is appropriate for all business types, from small and medium-size businesses to enterprise customers. ”

Slack (WORK) logo on a window.
Source: Shutterstock

To justify buying Slack stock, investors need to dig into the latest quarterly results first.

Slack Stock Slumps

Slack posted second-quarter revenue soaring 49% year-over-year. It added 8,000 new paid customers, with 87 of them accounting in over $1 million in annual recurring revenue. Chief Financial Officer Allen Shim said, “In a volatile macro environment, we remain focused on investing for long-term growth and driving innovation in this category.” This suggests that Slack will keep spending on the business while reporting more losses ahead. In Q2, GAAP operating loss was 32% of total revenue. Though it lost $68.6 million, this is better than the $363.7 million loss last year.

For the full fiscal year 2021, Slack expects to lose $75 million to $70 million (non-GAAP). Its non-GAAP earnings per share loss will be 13 cents to 14 cents.

Markets punished Slack shares because its bookings of $218.2 million missed consensus.

Heavy Competition

Investors should not ignore Microsoft’s (NASDAQ:MSFT) Teams offering. The product connects remote workers through chat, calendars, and instant messaging. Those features are good enough. By comparison, Slack is worth around $15 billion but as revenues top $870 million to $876 million for FY 2021, its losses grow. The break-even free cash flow is the only good data point.

Based on its future cash flow, WORK stock is worth $21.35 (per simplywall.st). On Wall Street, the company has nearly as many “hold” ratings as it has “buy” ratings. The average price target is $32.19 (per Tipranks).

Opportunity

Slack reported strong paid customer additions in the quarter. With the seasonal weakness ahead (holiday period), the unadjusted positive momentum may wane. CEO Allen Shim said on the conference call that growing momentum takes many quarters. He gave a cumulative period of two to three years as the time needed to build momentum. Billings lagged, so as the normal expansion resumes it will continue to disappoint.

CEO Shim described Q2 as a baseline for building its billings. The second half of the year has less visibility, although Q3 revenue will grow by 32% to 33% year-on-year. Also, Shim said, “renewals are going to be higher quality opportunities for us, and we believe that we continue to add a lot of value for these larger customers in particular. “

The recurring revenue will allow savvy investors to build a revenue multiples model that uses an appropriate set of metrics. For example, Slack stock is worth between $21.50 and $25.77 with these figures:

Metrics Range Conclusion
Selected LTM Revenue Multiple 15.0x – 18.0x 16.0x
Selected Fwd Revenue Multiple 13.2x – 16.2x 14.7x
Fair Value $21.49 – $25.77 $23.29
     
Benchmarks Ticker Full Ticker
Zoom Video Communications, Inc. ZM (Nasdaq:ZM)
Proofpoint, Inc. PFPT (Nasdaq:PFPT)
New Relic, Inc. NEWR (NYSE:NEWR)
salesforce.com, inc. CRM (NYSE:CRM)
Microsoft Corporation MSFT NASDAQ:MSFT)
Slack Technologies, Inc. WORK

Data courtesy of finbox (click on this link to change multiples).

Risks

After WORK stock fell post-earnings, shares are still expensive. The respectable quarterly results and the negative reaction is another risk for investors. Markets now demand massive earnings beat before bidding shares higher. The increasing bearish sentiment suggests that the stock could trend lower for the next few weeks.

As shown below, Slack has the lowest growth ratings score among its peers:

Slack has a very low growth score among its peers.

Slack has a very low growth score among its peers.

Chart courtesy of Stock Rover

If Slack re-tests lows for the year, investors should pile on the stock. And as the company posts strong revenue growth ahead, investors will get rewarded. Conversely, buying the stock now at nearly 20 times sales may prove risky. Bears are also building a short position, with over 12% of short float betting on a bigger correction ahead.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/why-slack-stock-risks-another-round-of-sharp-selling/.

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