Shares of Slack Technologies (WORK) , the ultra-hot workplace collaboration tools vendor, were down Friday morning from their opening price on Thursday, falling below $38 versus the open of $38.50.
The stock's mild retreat is partly reflective the day's weaker trading overall, with the Nasdaq Composite Index down fractionally. But it's also reflective of an extremely pricey stock. It is hard to see the shares doubling in a year's time, and at its present valuation, it's hard to see even a 30% move from here.
The company that began as Tiny Spec in 2009 is not tiny at this point. This company has become one of the most-identifiable artifacts of the changing nature of the workplace, the beginning of a shift away from email as the bedrock of communications. As such, the company represents a lot of where other enterprise software vendors, including Microsoft (MSFT - Get Report) and Salesforce (CRM - Get Report) , would like to be.
The 10 million people who log onto Slack in their offices, or their home offices, each day, is nothing compared to Twitter's roughy 400 million daily users, let alone Facebook's 1.6 billion. But within the confines of enterprise, where it takes decades for new technologies to gain a foothold, those ten million are equivalent to the software growing like weeds.
That position of influence for Slack should carry the day for its stock for many months to come, but it's still very expensive.
Slack's IPO is a "direct listing" on the New York Stock Exchange is different from traditional IPOs underwritten by banks. In this case, the opening price is not relative to any "offer price" by the banks, as in a normal IPO, but instead is set by the volume of buy and sell orders of market makers on the NYSE.
After the 118-million share listing, and with 504 million of its super-voting "Class B" shares, Slack now has a nearly $19 billion market capitalization at the current price. Based on $400 million in trailing revenue for the fiscal year ended in January, the stock is worth roughly 50 times trailing revenue. Estimates of two analysts compiled by FactSet, Rishi Jaluria of D.A. Davidson, and Dimitra Kallianiotis of Atlantic Equities, have the company making perhaps $600 million this year, and maybe just over $1 billion in revenue come January of 2022.
Even at $1 billion, this company fetches 19 times projected revenue, a very substantial premium to a top-tier software vendor such as Salesforce, which is still growing at 20% per year and is expected to make roughly $16 billion in revenue this fiscal year ending in January. That gives Salesforce a multiple of 7.6 times revenue.
Of course, like many tech startups, Slack is losing lots of money, and probably will for some time to come. The company lost $141 million last year on that $400 million in revenue. Those are the income-statement losses, but Slack's actual free cash flow was a negative $97 million for the year as well. Estimates by Jaluria and Kallianiotis have the company losing money through 2022, even as it reaches that first billion in sales.
To be sure, a company that's sold $400 million of software is a substantial software firm, and not to be dismissed. The numbers that likely are most prized by investors are those in the "key business metrics" section of the company's prospectus.
They include 95,000 paying customers, and a "net retention rate" of 138%. Retention rate is one of those magical terms on Wall Street for software companies: it should mean what percentage of customers renew subscriptions for the software product. But in Wall Street's whacky math world, retention rate actually includes new product sales to the same customers, in effect showing that the happy customers traded up to some additional features or packages. In any event, 138% is a very healthy rate of retention for any firm.
It's numbers like its retention rate that could make Slack acquisition bate for Salesforce, Microsoft or any large tech company that wants to add revenue by buying the attention of corporate teams. Salesforce just spent $15 billion to buy an enterprise software vendor with arguably less momentum, Tableau Software. Microsoft's LinkedIn purchase back in June of 2016 was for roughly $25 billion, so M&A of this scale is by no means out of the question.
The one caveat investors should be mindful of, besides the pricey valuation, is the absence of lock-ups. There are no restrictions on insiders selling shares, since the other things that come with a direct listing, apart from not having to pay underwriter fees, is a lack of restrictions commonly requiring insiders to hold shares for periods of 180 days or more. The insiders can convert their half a billion worth of Class B shares to A shares, and then sell those A shares "at any time," as Slack says.
Leaving aside avalanches of selling shareholders, Slack seems like it will retain some fans for having cracked the problem of bringing social networking to enterprise, a task where Salesforce and other established vendors have stumbled. But investors this Friday morning are having some jitters staring into a very demanding multiple.
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