Slack (WORK) - Get Report  recently released Q2 2019 earnings with some good news. Revenue growth remains strong, and given the progress this year, Slack felt confident enough to raise its full-year guidance.

Nonetheless, for now, it remains a challenge to invest in Slack at this valuation without the necessary margin of safety. The shares are best avoided for now.

Still Growing Fast

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Slack went into Q2 2019 earnings with very high expectations. Investors wanted to be positively surprised, and although Slack delivered above-consensus revenue growth, expectations ended up being too high and momentum investors took the opportunity to take some risk off the table. However, during the trading session the next day, investors calmly reappraised Slack's overall potential and its shares rapidly climbed, ending the day down just 3%.

Customer Churn Is Close To Non-Existent

The best tangible argument for investing in Slack boils down to the fact that net dollar retention rates continue to come in north of 135%. In essence, this implies that not only does Slack have close to zero churn among its customer base, but that it's having success with expanding its services to existing customers.

During Q2 2019, Slack notes that it now has more than 100,00 paid customers, not to mention 720 customers with more than $100,000 of annual recurring revenue.

Next, Slack highlights that as more customers join its platform, they are more likely to invite their partners or vendors. And the bigger each customers' channel becomes, the more sticky the platform as a whole grows.

Further, Slack asserts that it's determined to continue to invest heavily in its platform so that its product suite can increase in sophistication and lay the foundation for enterprises to derive maximum value from their use of Slack.

Valuation - No Margin Of Safety

To think about competition is a mandatory part of any investment thesis. The nature of business being what it is, the vast majority of companies have intense competition, which is normal. But when your competition is arguably the most successful software company of all-time, one has to at least ponder whether investing in Slack is attractive enough to contend with this huge overhanging risk.

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It's not just the fact that Microsoft (MSFT) - Get Report has the distribution, or that Microsoft's customers are mostly entrenched and familiar with its offering. When it comes to investing in Slack, it fundamentally boils down to valuation. It is extremely challenging to rationally argue by looking at the above table that Slack offers new shareholders a compelling risk-reward balance.

For example, consider that Slack trades for approximately 40 times trailing sales, which is a bigger multiple than Microsoft's earnings.

Many have questioned whether Slack is likely to struggle to get any meaningful traction as a stand-alone platform, with some arguing that Slack's best opportunity would be to be acquired by a well-funded company, such as Alphabet (GOOGL) - Get Report , given that the advertising giant does not have a strong enough productivity suite yet. However, this is a tough thesis also, particularly given that Alphabet has no real history of overpaying for its companies.

The Bottom Line

Slack's share price continues to slide, presently trading at a 22% discount to its IPO price of $38.50. Slack has a lot of potential and is not lacking in ambition as it seeks to disrupt an industry through a once-in-a-generation shift in the way people work together. However, I believe that investors are better off deploying their capital elsewhere.

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