Replies to post #59 on Slack Technologies, Inc. (WORK)

[JohnCM]

Where Will Slack Be in 5 Years?

The remote collaboration company could face tough competition, slowing growth, and wider losses over the next five years.

Leo Sun
The Motley Fool
May 8, 2020

Slack Technologies (NYSE:WORK) has been a divisive stock since its direct listing last June. The bulls claimed Slack's collaborative platform would disrupt the traditional email and messaging markets and change how people worked. The bears claimed Slack's moat wasn't wide enough to fend off rivals like Microsoft (NASDAQ:MSFT), and that it lacked a long-term path toward profitability.

The bulls initially lifted the stock from its debut price of $26 to the high $30s, but it subsequently stumbled back to the high $20s -- even as stay-at-home measures boosted interest in the stock. Slack certainly faces a lot of near-term challenges, but will its stock climb higher over the next five years?

What do the bears think about Slack?

Slack's revenue rose 110% in fiscal 2018, 82% in 2019, and 57% in 2020. In March, it estimated its revenue would rise 34%-37% in fiscal 2021, which ends next January. Slack's growth remains robust, but the bears believe its revenue growth could peak before it ever generates a profit. Slack expects its non-GAAP net loss to narrow from $0.28 per share in 2020 to $0.19-$0.21 in 2021, but its GAAP net losses -- which include big stock-based compensation (SBC) expenses -- could still widen.

On a GAAP basis, Slack's net loss widened from $138.9 million in 2019 to $568.4 million in 2020. SBC expenses, as a percentage of its revenue, jumped from 6% to a whopping 68% as the company expanded its workforce and subsidized salaries with big stock bonuses. That percentage should decline in 2020, but it highlights Slack's dependence on stock bonuses as it attempts to expand with negative cash flows.

Moreover, Microsoft recently revealed that its answer to Slack, Teams, had reached 75 million daily active users -- up from 44 million in March. Slack hasn't updated its daily active user count since last October (when it reached 12 million), and only recently revealed its platform hosted a peak of 12.5 million concurrent users in late March.

Microsoft is bundling Teams with its other Office 365 services, and that aggressive strategy -- which leverages its dominance of PC operating systems and productivity software -- could hurt Slack. Microsoft was reportedly interested in buying Slack four years ago, but it clearly believes it can crush it instead.

Slack's stock also isn't cheap relative to those of its peers. The stock trades at about 18 times the midpoint of its revenue forecast for fiscal 2021, and its slowing revenue growth, widening GAAP losses, and narrowing moat all make it tough to justify that premium.

What do the bulls think about Slack?

The bulls believe Slack's revenue growth will stabilize as it grows its base of larger customers. It also recently expanded its user base by acquiring Stride and HipChat Cloud from Atlassian.

Last quarter, Slack's total paid customers grew 25% annually to 110,000. 893 of those customers generated over $100,000 in annual recurring revenue, up from 645 a year earlier. 47% of its revenue came from those larger clients, up from 41% last year.

Slack CEO Stewart Butterfield recently dismissed the notion that Microsoft was a serious threat during a CNBC interview, noting that less than 30% of Microsoft's Office 365 users were using Teams. That percentage could rise, but it also suggests that there are still plenty of companies that don't wish to be tethered to Microsoft's ecosystem. Moreover, Slack's platform is already integrated with most of Microsoft's Office apps.

Slack's non-GAAP gross margin also expanded last year, which indicates it still has pricing power, and its free cash flow -- while negative -- is improving. Therefore, Slack's GAAP losses could eventually narrow as it weans itself off its dependence on stock bonuses. Slack was still holding $767 million in cash, cash equivalents, and marketable securities at the end of 2020, with zero debt -- so it won't be run off the road by Microsoft anytime soon.

Last but not least, Slack remains an attractive takeover target for other companies. Slack's valuation and enterprise value of $14 billion are a bit high, but cash-rich tech giants like Amazon, Cisco, and Alphabet's Google -- which all offer remote collaboration platforms -- could still be interested.

So where will Slack be in five years?

I believe the bear case against Slack is slightly stronger than the bull case. Slack's CEO might publicly dismiss Microsoft Teams as a rival, but its SEC filings clearly list Microsoft as its "primary competitor."

Slack's revenue growth will likely decelerate over the next five years, and it could struggle to narrow its losses while widening its moat. It could also be forced to issue debt or secondary stock offerings to maintain its cash flow. Those challenges, along with Slack's frothy valuation, could cause its stock to tread water and underperform other tech stocks over the next five years.

The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Atlassian, Microsoft, and Slack Technologies and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

Slack Is Beefing Up Its Balance Sheet

The enterprise messaging company prices an upsized bond offering to raise capital.

Evan Niu
(TMFNewCow)
Apr 8, 2020

Earlier this week, enterprise messaging and collaboration platform Slack (NYSE:WORK) announced a $600 million proposed offering of convertible senior notes, which included an option for institutional investors to collectively buy up to $90 million more of the debt. The company subsequently said it upsized the deal to $750 million while pricing the convertibles. In other words, Slack had no trouble finding buyers for its paper.

Here's what investors need to know about Slack beefing up its balance sheet.

Building the war chest

For context, Slack finished its most recent fiscal year that ended in January with around $769 million in cash and cash equivalents but excluding restricted cash. The $750 million that Slack is looking to raise will meaningfully strengthen the tech company's financial position, nearly doubling that cash while buying it time as it continues to work toward cash flow breakeven.

"And I just want to highlight, the [guidance] points us to getting to cash flow breakeven at the high end," CFO Allen Shim said on the last earnings call. "So consistent with what we have said in the past, we're going to invest in growth, but we're also going to make real steady progress to cash flow breakeven."

The company is not yet profitable and free cash flow and operating cash flow remain negative for the time being. Operating cash flow last fiscal year was negative $12.4 million, and free cash flow was negative $62 million.

In an interview with CNBC, CEO Stewart Butterfield acknowledged that the company was really trying to get ahead of potential economic impacts from the COVID-19 pandemic. "We're not immune to the overall macroeconomic conditions, but the initial response for slack has been a massive surge in interest," Butterfield said.

The chief executive pointed to a data point he had previously shared in an epic tweetstorm: In the first two months of the fiscal quarter, Slack has added 9,000 new paid customers, compared to the 5,000 new customers that Slack added in each of the prior two full quarters. Average utilization per user is also skyrocketing.

Butterfield also added that the offering was oversubscribed, which is partially what allowed Slack to upsize the deal and raise even more capital. Slack's customer base is quite diverse, including companies in the travel and hospitality sectors that are getting destroyed by the coronavirus outbreak. Offsetting some of that exposure is the fact that other large organizations are accelerating their Slack deployments, according to Butterfield.

The convertibles carry a 0.50% interest rate and will come due in 2025. The bonds will have an initial conversion price of $31, or a 27.5% premium to where the stock closed on Monday. In connection with the offering, Slack has entered into capped call transactions, a common hedging strategy that companies use when issuing convertibles that reduces the potential dilution related to any note conversions.