It’s a Whole New World for Slack Stock

The extent to which the world has changed since I wrote a bearish article on Slack Technologies (NYSE:WORK) stock is amazing.

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In that March 3 column, I was pessimistic about the shares because of their high valuation and my worries about the company’s competition.

But in the months since then, of course, a powerful work-from-home trend has taken hold amidst the novel coronavirus pandemic. Moreover, most of the stocks of tech companies that are perceived as benefiting from that trend are trading at stratospheric valuations.

For example, the trailing 12-month price-sales ratios of Zoom (NASDAQ:ZM) DocuSign (NASDAQ:DOCU) and Shopify (NYSE:SHOP) are 115, 36, and 60, respectively. In that context, the trailing price-sales ratio of Slack stock, which is 27, no longer looks very high at all.

Meanwhile, due to the likely huge increases in demand for products that make working from home easier, along with product improvements that Slack has implemented, I’m no longer worried about the company’s competition.

A Good Omen for Slack

On Aug. 31, Zoom reported that its second-quarter revenue had soared an incredible 355% year-over-year, while its operating income came in at $188 million, versus $2.3 million during the same period a year earlier. Importantly for Slack stock, Zoom noted that its customers with more than 10 employees rose more than 450%, to 370,200.

Zoom’s results strongly indicate that the demand for tools that help employees work from home is incredibly powerful. Slack’s tools certainly fit in that category. Indeed, on the company’s first-quarter earnings conference call, CEO Stewart Butterfield, said “Slack acts… like a digital office, a persistent place for users to connect and find information.”

Consequently, I expect that when Slack reports its results after the closing bell on Sept. 8, its Q2 earnings per share will exceed analysts’ average outlook of a 3-cent loss per share. In Q2 of 2019, the company reported a loss of 14 cents per share. Given Zoom’s results and the 458% year-over-year increase in its customers with more than 10 employees, I think Slack’s EPS will increase much more than 11 cents.

Also boding well for Slack’s Q2 results, as I mentioned earlier, are its Q1 earnings. In Q1, the company’s top line jumped 50% from the previous year, while it added 12,000 net new paid customers, setting a company record in the latter category. Even more impressively, Slack said that more than 90,000 net new organizations adopted one of the company’s free or paid subscription plans.

In a statement, Butterfield said:

“We believe the long-term impact the three months and counting of working from home will have on the way we work is of generational magnitude. This will continue to catalyze adoption for the new category of channel-based messaging platforms we created and for which we are still the only enterprise-grade offering.”

Reading between the lines, it’s clear that the company’s business benefited hugely from the work-from-home trend. So, it’s not surprising that, on the earnings call, Butterfield said that:

“companies transitioning to a work-from-home model are … beginning to realize that … they need the right enabling technology. E-mail and legacy collaboration tools won’t cut it. This reality will continue to catalyze adoption for the channel-based messaging platform category we created.”

Since the work-from-home trend persisted throughout Q2 after only lasting for a few weeks of Q1, I have little doubt that it will have a much bigger impact on Slack’s Q2 report than its Q1 earnings.

Product Improvement and a Deal With Amazon

In June, Slack launched Slack Connect, which allows users to “move all the conversations with {their} external partners, clients, vendors and others into Slack, replacing email.” Using the product, a Slack channel can be used by up to 20 organizations.

By enabling companies to use Slack to communicate with external parties, Slack has made its product much more valuable.

Also in June, Slack announced a deal with Amazon (NASDAQ:AMZN). Under the agreement, the tech giant’s cloud unit will use Slack for its team communications, according to Seeking Alpha.

The agreement will not only boost Slack’s revenue (since Amazon’s cloud business reportedly has 25,000 employees) but will also greatly boost Slack’s reputation. Since Amazon is regarded as a great company, many other firms are likely to follow its lead by utilizing Slack.

Finally, under the deal between Amazon and Slack, the latter company will utilize many of Amazon’s products. For example, Slack’s communications services will be powered by Amazon Chime, Amazon will provide its security infrastructure, and AWS Chatbot will help developers who use Slack to collaborate. The integration of Amazon’s tools with Slack will also greatly increase Slack’s appeal.

The Bottom Line on Slack Stock

Slack should report much stronger-than-expected Q2 results, causing the Street to recognize the company as a big winner of the work-from-home trend and significantly boosting Slack stock in the process.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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