SINGAPORE (June 17): In March last year, music streaming giant Spotify launched an unusual direct public offering on the New York Stock Exchange, as opposed to the IPO route most companies take. Messaging software firm Slack will take a page out of Spotify’s book for a similar path on June 20. “Companies like Slack that don’t need to raise any money are taking the cheapest, most efficient way to list their shares,” Rishi Jaluria, software analyst for DA Davidson in Portland, Oregon, told The Edge Singapore in a recent interview.
Like Spotify, which has a huge mindshare alongside its hefty market share in streaming music, Slack has a cult-like following and is increasingly the go-to messaging platform for companies large and small. It has deftly used a combination of freemium offerings and word-of-mouth promotions to boost sales. If you are an executive who is inundated with corporate email and work in a collaborative environment as part of a team, particularly in the technology sector, chances are that you already use Slack. “I have cut my emails down substantially since we started using Slack,” says Josh Brown, CEO of Ritholtz Wealth Management in New York.
Slack’s flagship software is essentially a productivity tool that saves time and helps streamline workflow and enhance more collaborative team effort. Jaluria, a long-time software analyst, says in his years of covering the software sector he has not seen companies with as much buzz as Slack. Everyone he knows — clients, friends, workmates, relatives — is either using Slack or looking to use it.
Slack calls itself a “global collaboration hub that makes people’s working lives simpler, more pleasant and more productive”. Duckju Kang, a former hedge fund executive who now runs a personal finance website called ValueChampion.Asia in Singapore, has been using Slack for the past three years. “While Slack has been a game changer for productivity, a good product doesn’t equal great business and doesn’t necessarily equal a great stock,” says Kang. “A great business needs not only a great product, but also a deep moat that allows it to fend off competition easily. Investors can still lose money by investing in great businesses if they are paying too much for their investments.”
The workplace chat and collaboration software maker has 10 million daily active users, more than 50 million weekly work hours are spent on the platform, more than one billion messages are sent weekly, and paid customers average nine hours connected to Slack every week, with at least 90 minutes of active usage on a typical workday. Those who use it do not just get hooked on it. Eighty-seven per cent of Slack users report that it improved communications and collaboration within their organisations. But DA Davidson’s Jaluria notes that while Slack may have a fanatical following among tech company employees, its use is not as widespread in finance, industrial or even media, where collaborative team-based work is done. “In the long run, the key will be Slack’s ability to gain meaningful penetration in non-technology companies,” he says.
Replacing email
Founded in 2009 by Canadian Stewart Butterfield, Russian immigrant Serguei Mourachov and Cal Henderson from England, Slack in its most recent equity-raising obtained US$427 million in Series H funding last year, which implied a total valuation of US$7.1 billion. In the secondary market, Slack shares recently traded as high as US$31.50, giving it a valuation of nearly US$19 billion ($25.9 billion). If it lists between US$32 and US$34 next week, as expected, Slack would have a market capitalisation of more than US$20 billion.
That is not bad for a company that has been focused on replacing corporate email. Jaluria notes that Slack offers several key advantages over email. “Slack is dynamic, real-time and collaborative, as opposed to email, which is static, ‘point in time’ and meant more for person-to-person communications,” he notes. Moreover, Slack offers historical context by archiving messages and enabling new users to an organisation or team to quickly access information. Slack can also serve as a central hub for teamwork through integrations with other software tools such as Microsoft Office 365, file hosting provider Dropbox and remote video conferencing service provider Zoom Video Communications, whereas email systems may rely on users’ switching environments constantly. Jaluria compares Slack to secure electronic signature firm DocuSign, which has helped replace physical signatures on documents. Docusign is popular among real estate agents, insurance agents and lawyers.
Clearly, unlike the recently listed ride-sharing behemoth Uber, which has little visibility in its own path to profitability, most analysts expect Slack to turn operating cash flow and free cash flow positive within two years. On May 30, Slack released the financial results for its first quarter, which showed revenues still growing as losses narrow further ahead of its direct listing. Its revenues in the financial year ended April 30 grew 67% over same period last year to US$134.8 million. It reported a net loss of US$31.9 million for the April quarter, smaller than the US$34.6 million reported loss for the January quarter as sales and marketing expenses fell sharply.
The software platform late last month also provided pre-listing guidance on its business prospects for the current quarter and year. Slack expects revenue growth to slow in its first quarter as a listed firm. For the second quarter of its 2020 financial year ending July 31, it expects revenue of US$139 million to US$141 million, up 52% in the mid-range, a significant slowdown from the 67% annualised growth it reported for the first financial quarter. For the full 2020 financial year that ends on Jan 31, 2020, Slack expects US$590 million to US$600 million in revenue, up 49% in the mid-range. Revenues grew 110% in financial year 2018 and 82% in financial year 2019.
Slack competes with collaborative productivity tools such as Microsoft’s Teams, salesforce.com’s Chatter, Facebook’s Workplace, and Google’s Hangouts. Can it ward off larger competitors that have long-standing relationships with enterprise customers? “There are lots of competing messaging and communications products but I think only Microsoft has come close,” says Jaluria. “I feel Microsoft’s Team has had traction only because basically it has been given away for free with Office 365, while people are happy to pay for Slack because it is a better product.” He cites a relatively new Slack feature called “Shared Channel”, which gives employees the ability to set up a channel on Slack to collaborate with people outside of the organisation on a work project that is unique. Most of Slack’s competitors have focused on non-desk office workers such as those in retail, hospitality and even manufacturing. Slack’s focus has been on areas in which there is true collaboration on work projects such as technology, media and, now, finance.
Slack versus Zoom
The direct listing comes at a time when software stocks, particularly those with a subscription model, have been ascendant. Microsoft recently became the world’s largest listed company with a trillion-dollar valuation ahead of Apple and Amazon.com, which have been battling it out for second place. Software companies are fairly insulated from trade wars, which have affected semiconductor and hardware stocks.
Slack has been compared to Zoom, which did its IPO at US$36 a share in late April. Zoom’s stock has nearly tripled in the seven weeks since its listing and traded at US$103 on June 12, giving it a market capitalisation of US$28 billion. “Slack’s valuation is rather high compared with Zoom’s,” says ValueChampion’s Kang, who advises investors to be wary of the stock. “The fact that Slack’s growth is slowing confirms that it is indeed very different from Zoom, which has far better growth prospects.”
Yet, Slack and Zoom are not seen as long-term standalone firms in Silicon Valley. Analysts expect that one or both will eventually be bought out by a predator and, as such, have a built-in acquisition premium right from the start. “Slack has been talked about as an acquisition target for many years, particularly before Microsoft revamped its Team product,” Kang concedes. “Now that Microsoft has its own product in the space, Slack definitely could be a target for other cloud platforms or service providers such as Amazon, Google or salesforce.”
Still, Kang notes that Slack’s valuation is similar to Zoom’s on an enterprise value-to-sales basis. “Even if both were getting an acquisition premium, their valuation probably shouldn’t be the same, given their different growth prospects and competitive environments,” he argues. “A prospective buyer would be more incentivised to pay up for assets such as Zoom than for Slack because, presumably, it is harder to grow the business post-acquisition if your existing competition is already strong.”
So, should investors bet on the death of corporate email? “I think there will always be some form of corporate email but, in industries and companies where a lot of people work closely in a collaborative environment, Slack will be the way to go,” says Jaluria. “It is more than just a messaging app. It is integrated into the workflow. It’s a hub where people come together and collaborate on whatever project they may be working on.” As more work becomes unstructured and team-based in nature, platforms such as Slack will thrive, replacing most of the internal emails. Yet, with the more than 17 times price-to-sales multiple at which it would list next week, the stock is not cheap. Investors eager to get a slice of Slack might want to wait for a pullback.
Assif Shameen is a technology writer based in North America
