Slack users' loyalty will overcome the company's financial turbulence over time, this analyst predicts.
Slack Technologies is the fastest-growing software-as-a-service company of all time and a Silicon Valley favorite, yet the direct public offering clearly did not go well for public investors.
Before the company releases second-quarter earnings Sept. 4, here’s insight into its revenue, valuation and competitors. Divergence in user base Slack’s revenue grew 110% in fiscal years 2017-2018, and then slowed to 82% in 2018-2019. The company is now forecasting 47%-50% growth in the current fiscal year with revenue between $590 million and $600 million, compared with $400 million in fiscal 2019. This year’s estimated adjusted loss is estimated to be 41 cents to 44 cents a share.
The formula for the net dollar retention rate is: Beginning of period revenue + upgrades – downgrades + churn=y with y/beginning of period revenue. Of course, we can name a long list of cloud-software companies with comparable price-to-sales or higher, but the difference is that Slack has not won over sell-side analysts, whereas Shopify SHOP, +0.67%, Zoom Video Communications ZM, +1.16% and Okta OKTA, -0.20% have. Certainly, returns are healthier if you can beat sell-side analysts to a winning stock.
Okta is a great example of a company that has similar numbers on its profit-and-loss statement, yet Okta earned its market cap through a series of strong earnings reports and gaining the trust of public investors, whereas Slack demanded a record-breaking price-to-sales right out of the gate. Twilio TWLO, +2.02% also has a similar profit-and-loss statement, but is trading at 16 forward price-to-sales.
Competitors There are some valid points on the more bearish side of the debate, but using Microsoft MSFT, +1.17% Team’s 13 million users as the primary weak point is not of them. As with most David and Goliath battles in tech, the market has this backwards. Microsoft then leveraged its hundreds of millions of enterprise software customers and copied Slack’s approach. Yet, somehow, Slack should be afraid of Microsoft? I disagree. Investors should be asking themselves why 600,000 organizations are downloading a separate app to hold their business discussions with many being Microsoft Office users.
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