I use the Slack (NYSE:WORK) platform every day for my chat room. It’s extremely efficient and facilitates communications between thousands of people. And that popularity surged even faster thanks to the pandemic. The global shutdown forced billions of people to adapt. Most took to cyberspace, and that put cloud services like Slack stock into hyper-drive mode.
The opportunity now is that Slack stock is still at a good entry level.
While other, similar stocks are too high to chase, this one is still reasonable. It’s 40% off its June highs and just above the middle distance to the March lows. Its problem so far has been the investor reactions to its earnings reports. The last two have been disastrous to the bulls. Each time, the buyers claw their way back up to build a better base. Luckily it manages to find support, so the fans gain more conviction.
I am not a fan of the valuations that Wall Street assigns to the newer cloud cohort in general. While Slack is not bloated, most others are. This is risk to WORK, because it will follow the herd if the herd falls off a cliff.
The so-called Covid stocks are getting too much credit for what they can do in the future. The highest profile example of this is Zoom Video (NASDAQ:ZM). The bulls have priced in over 100 years worth of sales into its current stock price.
For comparison, Slack stock has only about a 20x price-sales ratio. This is proof that the investors in it are five times more realistic than those in Zoom.
One can make the argument that Zoom grows faster, and that’s fine. But when the investors are more realistic with the expectations, then there is less of a chance of sustained disappointments. In simple terms, there is less potential downside on the chart for Slack than most other cloud stocks.
Levels Do Matter and this is a Good One
The Slack earnings report caused a 30% correction from the September high. The bad news is that this was the second time the bulls failed near $35 per share. This will be a problem area to contend with the next time they get back up there. While it is a big line of resistance, it also becomes the potential trigger for more upside.
Conversely the correction held above $25 per share again. Just like $35 was a problem, $25 now becomes the good news. The bulls found value there for the third time in a row. This provides a solid platform from which they can build more momentum.
They will need it to tackle the other resistance lines in between here and $35. The bulls are doing things right. They are establishing a higher-low trend one day at a time to claw their way back to it. There will be many setbacks but eventually they will overcome each line one. The bottom is a process not an event.
Investors who own it from here can be confident that there’s value just below current levels. They are not likely to get shaken out by one or two bad days, like what happened on Tuesday. The migration to products like Slack is here to stay, and maybe even expand into non-commercial uses. After all, companies are not the only ones to benefit from easier communication. I have already done that with a group of friends, and I bet I’m not alone.
Valuation matters, and this is definitely not a cheap stock, so it will be vulnerable to temporary dips. Long-term investors should stick to their bullish thesis and ignore the short-term noise.
The bears could inflict major damage, but only if they can take Slack stock below $24. From there, it could lose another 10%. I don’t expect that — it would be too close to the pandemic bottom. I don’t see the scenario where fear matches the worst case from March. Those lows should hold for a long while.
Besides even if the virus mutates and we restrict movement further, Slack and others like it will benefit even more. The less mobile people become, the more they need to use this platform.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.