Should Slack Be Worth More Than Etsy?

Why is the enterprise messaging startup worth more than the online market for artisans?

At first glance, business messaging start-up Slack and artisan e-commerce site Etsy (ETSY -0.86%) don't have much in common. However, both companies became unicorn start-ups by carving out niches in established markets.

Slack disrupted traditional enterprise email from companies like Microsoft (MSFT -1.27%) with rapid-fire messages delivered across multiple channels and platforms. Etsy created an online marketplace for handmade product makers that Amazon (AMZN -2.56%) had overlooked. Both companies also share a major common investor -- venture capital firm Accel.

Image source: Etsy website.

However, Slack was valued at $3.8 billion after its latest funding round in April, making it over four times as valuable as publicly traded Etsy's current enterprise value of $710 million. The bitter irony is that Etsy went public with a market valuation of $4 billion last April, but its missteps as a public company caused the stock to plunge.

Let's compare the growth trajectories of Slack and Etsy, discuss the consequences of going public too early, and see if the former should be more valuable than the latter.

How fast are Slack and Etsy growing?

Slack expects its recurring revenue to more than double from about $30 million last year to $64 million this year. The company operates on a freemium model, where users gain additional team communication features at tiers between $6.67 to $48 per month. Slack's daily active users hit 3 million in late May -- triple the amount it reported just six months earlier. Nearly a third of those users are paid members.

Etsy makes money by charging a $0.20 listing fee and a 3.5% fee on completed sales. Additional revenue comes from advertising services, payment processing, and discounted shipping labels. Etsy's revenue has grown 30% to 40% annually over the past few quarters. Last quarter, revenue rose 40% annually to $81.9 million, active sellers rose 12.3% to 1.6 million, and active buyers rose 20.1% to 25 million.

Slack's valuation of 127 times last year's sales would be jaw dropping for a public company. By comparison, Etsy has an EV/Sales ratio of 2.4, based on its revenue of nearly $300 million over the past four quarters. This means that if Slack were valued in the same way as Etsy, it would only be worth just $72 million based on 2015 sales and $144 million based on its estimated revenue for 2016.

Slack's mobile app. Image source: Google Play.

Look before you leap

Slack and Etsy are both disruptive niche companies, but they could both be crushed by larger companies. Slack's 3 million enterprise users are a drop in the pond compared to Microsoft's 300 million Skype users. That's probably why Microsoft reportedly abandoned an $8 billion bid for Slack to improve Skype for enterprise users. Growing public players like Atlassian (TEAM -1.06%) are aggressively expanding into the same market. Unless Slack can widen its moat against these rivals, it could have a tough time going public.

Meanwhile, Etsy didn't seem to fully consider the challenges of public scrutiny. To lighten its tax bill, it routed more revenue through an Irish subsidiary last summer, causing the company's B Corporation status (given to companies which aim to solve social and environmental problems) to be challenged. It subsequently launched Etsy Manufacturing, a service which matched sellers to small manufacturers. Some sellers saw the controversial move as a betrayal of its artisanal roots and an attempt to let non-handmade goods be sold on its market. Shortly afterwards, Amazon launched its own handmade goods site, Handmade at Amazon, to challenge Etsy. Shares of Etsy have fallen nearly 40% since that announcement.

Profits matter when battling giants

Etsy's decline probably wouldn't have been so severe if it was more profitable. However, the company squeezed out a net profit of just $1.2 million last quarter. That was much better than its net loss of $36.6 million a year earlier, but that figure was inflated considerably by a foreign exchange gain.

Slack isn't profitable at all. CEO Stewart Butterfield told the New York Times last year that the company's losses totalled a "couple hundred thousand dollars" per month. But as a private company, Slack can afford to rack up losses as it expands, as long as it can keep raising money. That's why if Etsy had stayed private, its valuation might be much higher today.