Slack (WORK) investors seeking relief haven’t found it yet. After losing 11.4% between September 1 and September 20, Slack stock crashed 4.8% yesterday to take its September losses to 15.7%. The broader S&P 500 (SPY) Index, as well as the tech-focused Nasdaq (QQQ) Index, ended up almost flat yesterday.
Yesterday, Slack stock saw its lowest close since it went public in June. Since its public debut, the stock has lost 37.5% so far. Slack shrugged off the traditional IPO route and bankers to go public directly.
On day one, Slack stock opened at $38.50, 48% higher than the reference price set by the NYSE. This month, Slack stock closed below the reference price, and the slide doesn’t appear ready to stop.
Bernstein questions Slack’s guidance
Yesterday’s slide in Slack stock was triggered by comments made by Bernstein analyst Mark Moerdler, who questioned Slack’s guidance for fiscal 2020 (ending January 2020). While maintaining a “market perform” rating and a price target of $28 (representing a 16% upside over yesterday’s close), the analyst warned that Slack might have set too easy a guidance target to achieve.
This practice of setting low targets for beating estimates is harmful in the long run, as investors begin to expect strong outperformance every quarter. This type of outperformance is difficult to deliver, considering the competitive landscape and slowing growth.
Analysts have become less bullish on Slack stock over the last month. The median price target has dropped by $3 to $37. The average price target has come down to $35.21 compared to $38.92 a month ago. Currently, eight analysts have a “buy” rating on Slack stock. An equal number of analysts recommend holding the stock.
Disrupting the disruptor
Slack rose to prominence on its promise to kill emails at work. Slack caught Microsoft’s (MSFT) attention early on, prompting the tech titan to consider buying it. Although the deal never took off, Microsoft ended up launching Microsoft Teams in late 2016.
This July, Microsoft announced that Teams had achieved 13 million daily active users. Slack had 10 million active users at the end of January. Considering Slack’s slowing growth, Microsoft Teams seems to have beaten Slack at its own game.
With Microsoft’s firepower and cross-selling opportunities behind it, Teams has a substantial advantage over Slack in tapping enterprise customers. Enterprise customers pay more than consumers for these products, and Teams has already become the fastest-growing product in Microsoft family. Ninety-one of the Fortune 100 companies use Microsoft Teams while only 65 use Slack. Teams is also bundled with an Office 365 subscription.
Facebook (FB) is also revamping its competing Workplace product. With 2.7 billion users across its platforms, Facebook has a significant advantage over the competition. Facebook also has an opportunity to bundle Workplace with ad credits to drive growth. Slack doesn’t have any other products except the team messaging platform.
Google’s (GOOG) Hangouts is also a potential threat to Slack’s dominance. Despite email-killer Slack’s presence, Google’s Gmail users continue to increase. Between February 2016 and October 2018, the number of active Gmail users rose by 50%. In all, Slack is facing tough competition from these industry behemoths.
Growth worries hampering Slack stock
Since Slack announced its Q2 earnings results, the focus has shifted to its growth and path to profitability. Slack reported 58% revenue growth in the second quarter of fiscal 2020, which points to a substantial slowdown.
According to its full-year guidance, Slack’s revenue growth is expected to fall further in fiscal 2020. In comparison, the company’s top line grew by over 100% in fiscal 2018 and 82% in fiscal 2019.
With the competition intensifying and Slack falling behind, the situation could worsen. The fact that Slack’s competitors have resorted to a price war could force Slack to cut its subscription fees.
The free version of Microsoft Teams offers greater functionality than Slack’s free version, and the paid version is cheaper than Slack’s paid version. Facebook Workplace’s premium version starts at $4 per user per month compared to Slack’s $6.67.
Slack has already begun implementing subscription discounts in specific markets. Lower pricing per user means Slack would have to showcase substantial growth in the number of paid users to offset the impact.
Slack stock: Is it at the bottom yet?
Despite hitting its lowest price since its public debut, Slack stock is still trading at $24.16, giving the company a market capitalization of over $13 billion. That translates to over 20x its fiscal 2020 projected revenues. For a loss-making company with no indication of becoming profitable in the near term, that’s still a steep valuation.
In comparison, Uber (UBER) is trading at about 4x its estimated fiscal 2019 revenues. Both Uber and Slack are Softbank Vision Fund (SFTBY) portfolio companies. Slack’s public debut in June helped the fund report billions in unrealized gains in the quarter ending in June.
However, Uber’s disappointing IPO offset some of those gains. With both Uber and Slack stock falling since the beginning of July, Softbank Vision Fund may have steep unrealized losses on its books in the current quarter.
To justify its 20x revenue multiple, we believe that Slack will have to grow faster and become profitable. Striking a balance between profitability and growth may be difficult in the current competitive environment. Daniel Romanoff of Morningstar sees further downside in Slack stock with a target price of $14.
In my opinion, the threats for Slack outweigh its strengths. While Slack is the boss in third-party integrations, I believe that Microsoft is better placed to offer a complete product family.