Replies to post #76 on Slack Technologies, Inc. (WORK)

[Staypositive1]

Yes. I was waiting for this up move with earnings coming up. Then i will short it before earnings heavily.

[JohnCM]

Slack Targeting Cash Flow Breakeven Before Profitability

The enterprise messaging company's capital-light model should help bolster free cash flow.

Motely Fool
By Evan Niu
Jun 20, 2019

Slack (NYSE:WORK) isn't the first unprofitable company to go public in recent memory, and it certainly won't be the last. It's rather rare for tech companies to be profitable when they go public (Zoom Video, which made its market debut in April, is unusual in this regard). The key consideration is whether those companies have a path to profitability on the horizon.

First things first, though, and Slack wants to get to cash flow breakeven before worrying about its GAAP bottom line.

Cash flow over accounting profits

In an interview with Bloomberg, CFO Allen Shim and CEO Stewart Butterfield discussed Slack's prospects going forward. Shim said Slack is primarily focused on cash flow that can be invested in the enterprise messaging company's future:

Well our primary focus right now is to invest in growth. And as we continue to build on what we think is a new category, that's going to be our focus for a long time. But we've also said to investors that our near-term priority is to drive toward cash flow breakeven. We have high confidence in the strong unit economics of our business that we can still invest very aggressively while driving toward that near-term profitability mark.

Butterfield elaborated on why cash flow is more important than GAAP profitability:

In [software-as-a-service], there's a lot of deferred revenue so accounting profitability isn't that much of a priority. As Allen was saying, bringing in more cash than we put out on an ongoing basis is a priority because it allows us to control our own destiny. The ideal for us though is that we continually find new ways and new opportunities to invest to further grow the business, so we don't need a lot of free cash flow. Just a little bit.

Earlier today, Butterfield noted that the reason Slack used a direct listing to go public instead of a traditional IPO was that the company simply doesn't need to raise capital right now, so there's little reason to dilute existing shareholders. Getting to cash flow breakeven would further reduce the need to raise capital, and Slack already has nearly $800 million in cash reserves.

A familiar capital-light model

For reference, here's how Slack's operating cash flow and capital expenditures (the two components of free cash flow) have performed over the past three fiscal years (Slack's fiscal years end in January):

The company notes that in 2017 and 2018, it made some cash payments related to tender offers and share repurchases, which Slack considers compensation (since it's buying back shares that were granted as equity-based compensation).

Slack utilizes a capital-light model that's becoming all too familiar these days by outsourcing cloud hosting and infrastructure to third-party providers, namely Amazon Web Services (AWS). Slack spends about $50 million per year on AWS. Much of Slack's capital spending over the past fiscal year has been leasehold improvements, which jumped from $26.2 million to $86.3 million.

The company opened a new office in San Francisco last year in order to get its employees into one building after rapidly growing head count, which more than doubled from January 2017 to nearly 1,700 at the end of April 2019.

Slack and two other recent tech IPOs are in a good position to withstand the worst of the COVID-19 crisis.

Leo Sun
Apr 7, 2020 at 10:57AM

The initial public offering (IPO) market has ground to a halt over the past month as the novel coronavirus (COVID-19) pandemic has forced several private companies to postpone their public market debuts. But as investors await the next batch of new offerings, now might be a good time to look back at some recent tech IPOs to see how they are doing and whether they have proven resilient throughout the broader market downturn that has dominated the news over the past two months. Here are three recent IPOs worth revisiting.

1. Slack Technologies: Well-insulated from the current crisis

Slack's (NYSE:WORK) platform helps employees connect with each other via messaging and collaboration tools. Usage of these services should surge throughout the COVID-19 crisis as more people are forced to work from home for long stretches.

Slack went public via a direct listing -- where employees of the company offer their existing shares for sale to the general public rather than creating new shares for initial offer -- last April. The stock currently trades slightly below its initial price of $26 a share due to concerns about its slowing growth, lack of profits, and competition from rivals like Microsoft Teams.

However, Slack still enjoys a first-mover advantage and is growing at a healthy clip. Its revenue rose 57% to $630.4 million last year as its total number of paid customers with over $1 million in annual recurring revenue jumped by 39%. Slack expects its revenue to rise 34%-37% in fiscal 2021, with a narrower net loss.

Slack's business remains well-insulated from the COVID-19 crisis, and it's an attractive option for companies that don't want to tether themselves to big tech companies like Microsoft. Slack's stock isn't cheap at 16 times this year's revenue, but its resilience throughout the pandemic could justify that premium valuation.

2. Pinterest: Growing rapidly despite the crisis

Pinterest (NYSE:PINS) also went public via a direct listing last April, and it still trades below its initial price of $19 per share. Pinterest got off to a strong start, but the stock was eventually weighed down by concerns about its slowing growth (especially in the U.S.) and its lack of profits.

The coronavirus crisis also cast doubts on the future of its core advertising business, which was evolving into an e-commerce platform when the pandemic struck. That shift, which let users shop via pins and retailers upload their entire catalogs to the platform, was widening its moat against Facebook's Instagram and other social networks.

Yet Pinterest is still growing rapidly. Its revenue rose 51% to $1.14 billion last year as its monthly active users grew 26% to 335 million and its average revenue per user rose 21% to $3.81. Most of its user growth is coming from overseas markets, but its domestic users still generated 90% of its revenue.

Pinterest expects its revenue to rise by 33% in 2020 as it monetizes more pins via ads and e-commerce features. Its ad growth could decelerate throughout the coronavirus crisis, but its user base should continue expanding as people spend more time at home. The stock is also reasonably valued at less than six times this year's sales.

3. GSX Techedu: Benefiting from the need to stay at home

Last June, the Chinese online education company GSX Techedu (NYSE:GSX) went public at $10.50 per ADS. The stock has more than tripled since then, as the coronavirus outbreak in China unexpectedly lit a fire under its remote learning services.

GSX's live streaming platform allows instructors to teach up to 100,000 students per session, and it claims to only hire certified teachers instead of freelancers. It also develops its own in-house curriculum instead of relying on third-party materials.

GSX's revenue surged 432% last year, its gross billings jumped 413%, and its net income soared 659%. Its total enrollments increased by 258% to 2.74 million. It didn't provide guidance for the full year, but it expects its revenue to rise 303%-311% annually in the first quarter.

Those growth rates are phenomenal, but GSX still faces intense competition in China's online education market, and it's increasingly dependent on free trials and promotions. The stock is also richly valued at 120 times forward earnings. Nonetheless, investors seeking a speculative play that can weather the coronavirus crisis should take a closer look at this multi-bagger stock, which could still have more room to run.