Slack Shares Might Start to Slack Off

In the summer of 2019, Slack (NYSE:WORK) came public and shares of Slack stock soared 48.5% on its first day of trading. But since then, the returns evaporated. And this is certainly ominous since there has been a boom in tech IPOs since, as seen with companies like Zoom Video Communications (NASDAQ:ZM) and Docusign (NASDAQ:DOCU).

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

Regardless, Slack is a solid app and continues to see growth. The platform, which allows for workplace collaborations, makes it possible for a user to setup private or public groups – say for the support department – to better organize texts, documents and audio/video calls. For the most part, Slack is trying to ultimately eliminate the need for email, which is often cumbersome and tedious.

Over the years, the company invested heavily in innovating the platform. Here are some of the functions that are on the roadmap:

  • Asynchronous video messaging that’s similar to what’s offered on Facebook’s (NASDAQ:FB) Instagram.
  • A verification system for organizations, which should help reduce spam.
  • Enterprise security for Slack apps (this will be a paid service).
  • Data retention systems to help enforce compliance.
  • An always-on audio function that serves as a virtual walkie-talkie

The growth ramp for Slack stock continued as well. In the latest earnings report, revenue jumped by 49% to $215.9 million and the company added 8,000 net new paid customers. Note that 87% of the paid user base generates more than $1 million in annual recurring revenue. The net dollar retention rate is also an impressive 125%.

But despite all this, investors should still be wary. Slack stock still faces some considerable headwinds.

Let’s see why.

The Risks

A major tailwind for Slack stock has been the remote-work boom, driven by the novel coronavirus pandemic. The company’s platform was essential in allowing teams to remain productive.

But the trend may prove temporary. Recently Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) announced encouraging results from their Phase 3 trials for their Covid-19 vaccines. And these will likely not be the only success stories. Other companies like AstraZeneca (NASDAQ:AZN), Johnson & Johnson (NYSE:JNJ) and Novavax (NASDAQ:NVAX) have promising vaccines.

So by the first half of next year, there could be considerable progress against the virus – and this will lead to many companies opening up their offices. The fact is that there are clear benefits to people working together, which really cannot be replicated with technology.

It’s also important to keep in mind that Slack is still a relatively narrow application. For the most part, the sweet spot has been for technology-driven organizations, such as to allow for improved collaboration with developers.

But there are some other issues for Slack.  Perhaps the most threatening is the intense competition. In fact, because of this, Morgan Stanley analyst recently downgraded the rating from “equal weight” to “underweight” on the company’s shares.  In his commentary, he mentioned the impact of tough rivals like Zoom, Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT).

And of all of these, MSFT may actually prove the most dangerous. The company’s Team platform continues to see lots of traction. Microsoft also is leveraging its massive franchises like Office 365.

As a clear sign that this strategy has taken a toll is that Slack has filed an anti-competition complaint against the software giant with the European Commission in July.

Bottom Line On Slack Stock

In the next couple quarters, Slack may start to see a deceleration in its revenue. The reason: the billings have been falling. In the latest quarter, they dropped from 38% to 25% on sequential basis.

And even though Slack stock is 27% of its high, the shares are still far from cheap. Note that the price-to-sales ratio is a hefty 23X. Thus, for now, it’s probably best to hold off.

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

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling.  He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.


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