Should investors buy themselves some Slack?

A new tech IPO has taken place, this time it is the communication tool company Slack. Should investors buy in?

Article updated: 20 June 2019 12:00pm Author: Michael Baxter

There’s a new word. It’s slackenfreude. It means “the joy in knowing that as a Slack group grows, the likelihood of a new member searching their name and finding they’ve been slagged on in earlier conversations reaches 99.9%”

Slack is a bit like WhatsApp for business. It’s a tool that supports communication within an organisation or between individuals collaborating on a project, and some have given it rather an impressive billing — the tool that could replace email.

I am on a downer regarding email at the moment. I get too many, and it is getting difficult to spot the useful email, the important email, the maybe useful email and the rubbish. I am also finding it increasingly difficult to find old emails too.

I am not alone, that’s why increasingly more people are predicting its death. There are indeed so many ways of communicating. You can message people on LinkedIn, for example, and there are WhatsApp groups — they are a great way for small groups of people to communicate.

Slack is targeted at the business end, and within some businesses it is becoming enormously popular.

But let’s look at the numbers:

The company is being valued at $17 billion, 600,000 organisations use it, it has 95,000 paying customers. And made a loss of $139 million last year.

At first glance it’s another company with a massive valuation from massive losses and modest turnover. In fact the company projects revenue of around $600 million in its financial year to January 2020.

So that’s quite the valuation.

But Slack does have some interesting things going for it. Revenue was up 70 per cent in the last year, the number of users paying over £100,000 a year rose 90 per cent, and gross margin was 90 per cent.

The company has $800 million in cash, and is not using the IPO to raise money.

We all know that from time to time, ‘must have’ products go out of fashion or get disrupted by some new product. MySpace once seemed unbeatable, then along came Facebook. And in the business software case, do you remember Lotus, and Lotus 123, it provided the business software of choice until Microsoft came along with Word, Excel and Access.

There is no guarantee that Slack won’t go the same way, but it does have an advantage. Because it is a network product, its usefulness is a function of how many people within an organisation use it, and the archive of communication, so it is much harder to disrupt.

It does not take much imagination to envision how that $139 million loss can become profit, how that projected $600 million turnover can become $1 billion, $2 billion or more, and how that profit can then rise to a level that makes its current valuation seem modest.

Don’t tar all techs with the same brush. The success of Lyft and Uber is dependent on a future shift to autonomous cars and car sharing. But not all tech IPOs hinge on some future shift in the way we do things. Some just require a continuation of a trajectory already in place, Slack would appear to be an example of such a company.

It is easy to convince yourself we are seeing another dotcom style crash. But frankly, people have been saying that for years. They said it with the IPO of Google, they said it with the IPO of LinkedIn and then Facebook.

These companies more than justified their IPO price with future profits, or on the case of LinkedIn, when it was bought by Microsoft for $26.2 billion, from a valuation of less than a third of that amount at IPO eight years ago.

That is not to say there won’t be a tech crash at some point, but when you look at the detail, you find the rationale for valuations differ enormously from wild assumptions about the future, to apparently reasonable projections on continued growth.

But there is another side to the Slack IPO that is just as interesting. It is going direct. By that I mean it is bypassing the banks, cutting the fees from the IPO enormously. The banks are worried.

You may fret that techs are overvalued, I fret how technology is disrupting more and more traditional businesses.

You may think tech investing is risky, I think that in an age of such rapid technology change, investing in many traditional companies is risky, and ignoring tech may be a risky thing to do.

If you want to invest in Slack in an account with us when it launches in the market, make sure you have submitted a W-8BEN form to permit deals in American shares.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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