Around 117 million Slack shares will start trading today at around $26 a piece on NYSE under the “WORK” ticker symbol. The company has grown by monetizing its corporate messaging service that was initially developed for internal use.
It’s a Direct Listing
This means the going-public event is not tied to the need to raise cash (it has $800 million+ on its balance sheet) but rather the need to provide liquidity to existing shareholders (many institutional shareholders will be offloading some of their holdings) as well as income to employees who will be able to cash their RSUs.
Sometimes, this sort of coming out party indicates that all is not well at the company. This may not be the story for Slack, which has been trading quite a bit in the private market where it was last valued at $16.7 billion. However, the lack of a lock-in period allows early investors to cash out quickly, pulling down prices soon after the shares start trading, which can lead to a certain amount of volatility.
Morgan Stanley, Goldman Sachs and Allen & Co. are advising the company and Citadel Securities is serving as its market maker.
According to Slack’s S-1 filing, its biggest outside shareholders are Accel (24% share), Andreessen Horowitz (13.3%), Social Capital (10.2%) and SoftBank (7.3 %).
Financials Reflect Tech Company in Growth Phase
In its fiscal year ending January 2019, Slack generated $400.6 million in revenue, which was up over 80% from 2018. This allowed it to lower its losses from $181.0 million in 2018 to $140.7 million last year. The cash burn rate of $41.1 million in the year suggests that balance sheet cash may be enough to take the company to profitability, especially given the strong revenue generating capability.
While less than a 100,000 companies currently subscribe to the service, the number has grown 49% in 2019. There are also another 500,000 organizations with three or more employees trialing a free subscription plan. Not all subscribers are small however. More than 65 are Fortune 100 companies while 575 are big companies paying more than $100,000 a year (this group accounted for 40% of revenue and grew 93% in 2019).
Bloomberg Intelligence estimates that Slack could generate up to 65% of its revenue in 2020 from free-to-premium conversion. Since the company expects to generate $590 million in revenue, conversions would come to $383.5 million in that case.
The User Ecosystem Appears Healthy
The company has more than 10 million daily active users. In the week ended January 31, 2019, these users spent 50 million hours sending more than a billion messages. While the user count pales in comparison to service providers like Netflix NFLX or Spotify SPOT, which are pretty well known on Wall Street, the number could grow quickly given the large number of organizations currently on trial.
Moreover, Slack’s subscriptions aren’t exactly comparable: the growth in large organizations is particularly encouraging because wins from this group will bring in a substantially higher number of users, and therefore, revenue.
There Are Significant Competitors
While Slack’s workplace communications business is growing rapidly, there are competing services from Microsoft MSFT and Alphabet GOOGL that are part of their enterprise suite. Cisco CSCO, which provides unified communications services and Facebook FB, which has been exploring the business software market are other contenders in the space.
Follow-on Offering Can’t Be Ruled Out
Growth companies typically need a lot of cash as they have to invest in the business to keep the growth rates up. If the market is conducive; in this case, if the shares are stable and show healthy appreciation, raising some more cash won’t hurt.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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