After months of anticipation, Slack Technologies (NYSE:WORK) finally went public today. Shares of the fast-growing, cloud-based office-communication platform jumped in their unconventional debut, rising more than 50% in afternoon trading from the $26 reference price the company set yesterday.
Slack chose to go public through a direct listing, rather than the standard initial public offering. It's a move that saves the company money on underwriting fees, but also forgoes the usual windfall from new investors that an IPO brings in.
Direct listings tend to be favored by companies that are confident in their cash position and their ability to turn a profit, and believe their offering will be well-received by the market. Direct public offerings don't come with the usual "road show," where companies pitch their stock to big investors ahead of the IPO.
Since Slack doesn't have to pay underwriting fees or dilute its stock with additional shares sold to new investors, the move strongly favors current shareholders, including insiders and early investors. What's more, those insiders won't have to abide by the usual lockup period of 90 or 180 days before they can sell their shares.
It's no wonder, then, that Slack's shareholders are celebrating after the company's valuation soared to roughly $24.3 billion. That's more than triple its $7.1 billion valuation in its last funding round, last August.
The big winners
In addition to insiders like CEO Stewart Butterfield, who owns 42.5 million shares (8.4% of the company), four major investors stand to reap a huge windfall from today's public offering. They are:
- Accel, a venture capital firm; it owns 119.8 million shares, or 23.8% of the company.
- Andreessen Horowitz, another well-known VC firm; it owns 66.5 million shares, or 13.2% of the company.
- Social Capital, a venture capital firm; it owns 50.9 million shares, equivalent to 10.1% of the company.
- Softbank, the Japanese conglomerate and prolific investor; its Vision Fund owns 36.6 million shares, or 7.3% of the company.
During its 15 funding rounds, Slack sold 373,372 shares outstanding of convertible preferred stock at an average price of $3.73. With the stock trading above $41 per share as of Thursday afternoon, the investors listed above saw gains of about 1,000%.
Slack said that it expected its registered shareholders to sell about 11.5 million shares on its debut day. By 2:30 p.m. EDT, more than 118 million shares had exchanged hands, indicating that day traders are moving in and out of the stock quickly, though the stock price has been relatively stable since it opened shortly after noon.
Can Slack make you rich?
It's clear that Slack made early investors and insiders rich to the tune of more than $20 billion. But can it do the same for you?
Slack's revenue grew 82% to $400.5 million last year, an impressive growth rate, but in the first quarter that slowed to 67%. Over the last four quarters, the company has reported $454 million in sales, giving the stock a sky-high trailing price-to-sales ratio of about 50 following its market debut. By comparison, the average stock on the S&P 500 trades at a price-to-earnings ratio of about 22, and Slack even looks dearly priced compared to other recent SaaS (software-as-a-service) IPOs like Okta, PagerDuty, and MongoDB, which trade with P/S ratios in the range of 20 and are also seeing rapid growth. In other words, investors have very high expectations for Slack, and its stock could easily tumble if growth disappoints or the company encounters unforeseen challenges.
Competition for the email disruptor is also rising, in particular from Microsoft Teams, but also from Alphabet's Google and Cisco Systems.
Slack has no debt and about $800 million in cash and marketable securities, which explains why the company did not seek any additional funding when it went public. However, it lost $140 million last year, and $33.3 million in the first quarter, indicating that profitability may be years away. In its risk factors, the company warned it may never achieve profitability, though this is a standard disclosure for unprofitable companies going public.
Considering that Slack's market cap has already exceeded $20 billion, its price-to-sales valuation is one of the highest on the market, and competition is moving into the space, new investors may want to temper their expectations for Wall Street's latest debutante.