Despite numerous catalysts, Slack Technologies (NYSE:WORK) stock has gone through bouts of volatility. No stock is immune to volatility, but many investors have been disappointed with Slack stock lately.
That’s as cases of the novel coronavirus continue to rise at a rapid rate. Yet despite that, Slack stock hasn’t really responded the way investors were anticipating.
A Global Catalyst
The coronavirus forced businesses and the public to adapt to the new world. Companies are pivoting to remote-work technologies, like Slack. Small businesses are moving online with companies like Shopify (NASDAQ:SHOP), while the public finds other means of entertainment, like streaming video through Netflix (NASDAQ:NFLX).
For Slack, this accelerated the adoption rate of its platform, even though it competes with Microsoft (NASDAQ:MSFT) Teams.
That’s going to keep the revenue flowing for companies like Slack, as well as other so-called “coronavirus stocks.” The question is, will the stock begin trading like it?
Breaking Down Slack
Slack has reasonable secular growth behind it. Not only is there a shift in the way we communicate at work and with various entities, but Covid-19 accelerated the need for this type of platform. In other words, Slack had growth before the pandemic and that growth accelerated as a result. While the stock price has seen spikes, the rallies weren’t sustained.
In any regard, this company has growth. Analysts expect about 40% revenue growth this year. Proving that Wall Street doesn’t think this year’s growth is simply a one-time boost due to Covid-19, estimates call for another ~30% revenue growth in FY 2022 (next year).
If those numbers come to fruition, Slack will rack up more than $1.1 billion in sales next year. That’s pretty spectacular and leaves WORK stock trading at just 15 times next year’s revenue.
Fifteen times sales isn’t necessarily cheap in many instances, but in a tech sector where growth is robust, this is hardly the most expensive stock investors will run across. On a trailing 12-month basis, Slack is almost free cash flow positive, a major swing from the last few years.
The balance sheet is in great shape, too.
Cash and equivalents sit at $1.53 billion, roughly triple the company’s $518 million in current liabilities. While Slack did tack on $630 million in long-term debt this year, I still find the cash-to-debt situation to be more than comfortable at this point.
Trading Slack Stock
Slack stock is not an easy one to wrap your head around. On the surface, it has all the hallmarks of what should be a higher stock price.
It’s a coronavirus play and has solid revenue growth. Its balance sheet is solid, while cash flow and the bottom line are moving in the right direction.
When Slack reported earnings in September, the company reported break-even profit and revenue growth of ~49%. Both results beat expectations, but the stock sank 13.9%. That followed a 16.2% decline in the four days leading up to earnings.
For now, the $24 level continues to hold as support. That was the post-earnings low for Slack stock in early September. It’s also where the November low comes into play. However, Slack now faces all of its major weekly moving averages between $27.50 and $28.80.
If it can push through these marks – just as it did in October – $32-plus could be in the cards. However, if $24 fails as support, it would potentially put $20 in play. Personally, I would love a dip down to $20 in this name, as it would give us a lower-risk buying opportunity. However, I’m not sure it will come to be.
Even without the deep pullback, I think Slack stock is worth a look. For whatever reason, it doesn’t get much love from Wall Street. My speculation is that investors think adoption of Slack is only due to Covid-19 and it faces too much risk from Microsoft.
Perhaps that is true.
But the company just delivered 49% revenue growth in the latest quarter and sports solid estimates for the next six quarters. Last quarter, Slack also delivered positive free cash flow and raised its full-year earnings and revenue estimates.
Buyers who are interested but skeptical can use a close below $24 as their stop-loss. Otherwise, keep in mind this stock topped $40 in 2019 and hit this price in June.
On the date of publication, Bret Kenwell held a long position in SHOP.