Slack becomes public. Its stock will not be cheap

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First, Slack Technologies tried to kill the emails. Now, we hope to eliminate the traditional IPO. This week, the fashionable collaboration software company will list its shares on the New York Stock Exchange as part of a public offering.

Slack follows the path of
Spotify technology

(ticker: SPOT), who also chose a direct list to become public. Unlike an initial public offering, the listing does not accompany any capital increase. Slack will not issue new shares to investors.

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Some experts have predicted chaos when Spotify unearthed the direct approach rarely used in April 2018. But the process finally seemed pretty ordinary. The stock price did not collapse on the day of its IPO. A few months after the start of public life, Spotify's shares were well above their opening price, although the stock has since declined by 13% overall.

So what happens to Slack? There are many reasons to be optimistic about the long-term opportunity for Slack and the performance of his shares, which will trade under the symbol "WORK". The purchase or sale will depend on its valuation from the first day. More on that later.

First, a guide: Slack is a versatile software tool that attempts to supplant e-mail in many organizations. The company has more than 10 million daily active users, spread over 600,000 organizations in 150 countries. Users are sending over a billion messages on Slack every week and it is said that an average user is engaged on the platform for more than 90 minutes each business day. Slack has 95,000 paying customers, all through corporate accounts.

the Barron newsroom can talk about the effectiveness of the product. In the last 18 months, Slack has exceeded our Gmail business accounts as the primary form of interaction. (We still talk to each other occasionally.)

Slack says in its listing prospectus that, while email has become "the universal default routing mechanism for enterprise software," it remains "an inefficient way of sharing and managing information and information." 39, activity generated by this software.

However, Slack admits in his flyer that "we (and the rest of the world) still have trouble explaining Slack. It's an operating system for teams, a hub for collaboration, connective tissue throughout the organization, and more. "

Whatever you call, customers jump on board. For the current fiscal year, Slack's business turnover is increasing from 47% to 50%, from $ 590 million to $ 600 million. The Company expects an adjusted operating loss of $ 182 million to $ 192 million compared to $ 141 million for the year ended January.

E = Estimate * For the financial year ending in January 2020
Note: Slack's recent price was a private market trade.

Source: FactSet; company reports

Its growth, while remaining robust, slows down. Or maybe the company has chosen to take a conservative approach to its financial forecast. It has the benefit of seeing how investors have reacted to
Lyft
of the
(LYFT) announces disappointing results shortly after its IPO on March 28. Lyft's shares are down 16% from the IPO price. It is better to manage expectations even before the company is public.

There is an active private market for Slack shares. According to the company's prospectus, prices in May ranged from $ 25.75 to $ 31.50 per share. (Slack raised $ 1.4 billion in venture capital, with close to $ 800 million in cash and securities and no debt.)

Private trades offer clues about valuation but no insurance. The highest market in Spotify's private market, for example, was $ 132.50, and the largest single market was $ 165.90, an increase of 25%.

D.A. Davidson analyst Rishi Jaluria launched Slack's coverage last month and recently raised its price target from $ 27 to $ 31, reflecting new data on private market transactions. Using the Spotify 25% premium example, Slack would actually be looking for $ 39 a share on the first day.

After full dilution, Slack will have approximately 600 million shares outstanding. At $ 31 per share, the company would have a market value of $ 18.6 billion, about 31 times the company's high-end revenue forecast for fiscal year 2020.

It is a vertiginous territory, but within the reach of other young technological companies. Zoom Video Communications (ZM), newly public, exchanges at 51 times the projected revenues of the current year.
Atlassian

(TEAM),
Okta

(OKTA)
MongoDB

(BMD), and
PagerDuty

(PD) all trade between 24 and 27 times earnings. More mature cloud-based software vendors have lower valuations – Workday (WDAY) exchanges for 13 times sales,
Microsoft

(MSFT) for eight, and
Salesforce.com

(CRM) for seven.

Slack is also facing competition, mostly from Microsoft, which has more than 500,000 companies using its Teams collaboration product. But Jaluria notes that the teams are bundled with Office 365. "It's hard to count Microsoft in everything they do at this point, but I have not met any customers who use it significantly," says Jaluria. he.

Uber Technologies

(UBER) and Lyft dropped some investors on the IPO market this year. Like Lyft, Uber is trading below its introductory price, down 4% from supply.

But comparisons are limited. The two struggling companies are struggling to reap the benefits of consumer-driven businesses. Slack has a business model that brings some rigidity and pricing power. The recent IPOs for software and enterprise services have been very successful, including PagerDuty, Zoom,
Quickly

(FSLY), and just last week,
CrowdStrike Holdings

(CRWD) (see table).

Given the current demand for corporate securities, Slack is likely to be a good deal and could benefit from the type of valuation recently achieved by Zoom, the videoconferencing firm. Do not be surprised to see Slack shares open in the $ 30 range. At this price, long-term investors should stay away. Jaluria has a neutral rating on the stock, which reflects its concern over valuation, especially in light of Slack's cautious forecasts.

Replacing e-mail is a huge and welcome opportunity, but it will take time. Investors must wait until the hype fades before jumping quickly into Slack's stock.

Write to Eric J. Savitz at [email protected]