Remote-work-facilitation-platform Slack Technologies (NYSE:WORK) is undoubtedly a beneficiary of the changes precipitated by the onset of the novel coronavirus. The teleworking trend is reflected in the Slack stock price, which doubled from mid-March to early June.
However, Slack stock has cooled off since that time. Skeptical investors might wonder whether this is a sign that Slack is past its prime.
Shorting Slack now would be a foolish move. It’s probably true that expectations surrounding Slack were overheated in the second quarter, setting up those who bought the shares then for disappointment.
But the decline has created a lower entry point for anyone seeking to invest in Slack stock. Buying the shares is an easy way to wager on the long-term outlook of a company with strong revenue growth. More broadly, it’s a way to capitalize on the future of remote work.
A Closer Look at Slack Stock
The shares’ 52-week range of $15.10 to $40.07 tells an exciting story. Clearly, the stock’s rebound from the March low to the June peak was swift and powerful.
Unfortunately for the owners of Slack stock, the bulls weren’t able to hold the $40 level for very long. To a large extent, that is because the trading community was unimpressed with Slack’s Q2 earnings report.
As InvestorPlace contributor Thomas Niel reported, “After falling short on investor expectations, Slack stock tumbled 13.9% alone on Sept. 9 following the disappointing news.”
By early October, Slack’s shares were trading at the $28 level. That’s a fairly deep discount compared to its summertime peak of around $40. This, then, raises a billion-dollar question: Is Slack a value trap now or is the software-as-a-service company poised for a turnaround?
Not Such a Bad Quarter
With Slack’s shares falling nearly 14% after its Q2 earnings data was released, you might suspect that the results must have been truly awful.
Yet that’s really not the case. If anything, I think that the workplace-collaboration-software company maintained a steady pace of revenue growth last quarter.
As evidence of this, note that Slack’s Q2 revenue jumped a very impressive 49% year-over-year to $215.9 million.
Not only that, but the company revealed that its paid customer base rose 30% YOY to 130,000.
It’s interesting to consider the possibility that the trading community wasn’t impressed with these results. I suspect that the hype over the remote-work trend simply got ahead of itself. The expectations for Slack were unrealistically high, so a letdown was almost inevitable.
Slack’s ability to connect remote workers and teams is prominently featured in a product that’s appropriately named Slack Connect. This is an extension of Channels, Slack’s popular platform which enables as many as 20 organizations to collaborate.
In a press release, Slack CEO Stewart Butterfield commented on Connect’s outstanding progress:
“We ended the quarter with more than 380,000 connected endpoints, up more than 200% year-over-year, and now more than 52,000 paid customers use Connect, up 160% year-over-year.”
With that growth rate, Connect poses a serious threat to Microsoft’s (NASDAQ:MSFT) rival videoconferencing product, Microsoft Teams. Moreover, as more and more business teams use Connect, they will keep utilizing the Slack platform.
While the workers are in the Slack platform, “they can create private and public channels, send direct messages, share documents and have video conferences,” as Louis Navellier and the InvestorPlace research staff have pointed out.
Thus, while Connect is indeed connecting teams, it’s also keeping businesses engaged in the Slack ecosystem.
The Bottom Line
While expectations for Slack ran high, the disappointment following its earnings release was unjustified. Strong revenue growth, combined with Connect’s ability to keep teams engaged, make Slack stock a rare and extraordinary buying-on-weakness opportunity.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.