Investors are clearly excited that wildly popular enterprise messaging service Slack (NYSE:WORK) has finally hit the public markets. Slack opted for a direct listing instead of a traditional IPO, setting a reference price of $26 earlier this week before trading commenced yesterday. Shares immediately opened nearly 50% higher than that reference price and soared as high as $42 yesterday.

Are Slack investors getting ahead of themselves?

Slack app interface on Mac

Image source: Slack.

Slack's price-to-sales multiple is in the clouds

The market is already pricing in extraordinary expectations for Slack going forward, even as the company's revenue growth has been decelerating, a natural result of a growing revenue base. On a trailing-12-month (TTM) basis, Slack has recognized $454.5 million in revenue as of its most recent fiscal quarter, which ended in April.

At that time, it also had 896,057 Class A shares and 529.3 million Class B shares outstanding, according to the prospectus. (That outstanding share count excludes shares issuable to options and restricted stock units that have been granted to employees as stock-based compensation.) Both share classes are identical except for voting rights. Class A shares get one vote per share and Class B shares get 10 votes per share, with Class B shares converting to Class A before they can be sold to public investors. At $38 per share, Slack boasts a market cap of $20.15 billion.

In other words, Slack is trading at over 44.3 times trailing sales. That's an incredibly lofty valuation, even among cloud-based enterprise peers notorious for fetching rich multiples.

Slack is more expensive than peers

To be clear, there's a lot about Slack's business to be excited about. The service is incredibly popular and enjoys rave word-of-mouth recommendations, often considered the best form of advertising a company can get, which leads to bottom-up adoption within enterprises. The number of paid customers that generate over $100,000 in annual recurring revenue (ARR) continues to march steadily higher.

But if you stack Slack up against other enterprise collaboration and enterprise software peers, the valuation may be tough to justify.

Company

P/S (TTM)

Slack

44.3

Atlassian

28.7

Dropbox

6.8

Box

4.2

Okta

33.2

ServiceNow

18.5

Zuora

6.8

Data sources: Slack prospectus and Morningstar.

Of course, P/S multiples alone don't tell the whole story, but a sky-high ratio means that Slack will have to execute flawlessly in the years ahead to justify such a premium, and risks getting forcefully punished for any missteps. The company is prioritizing cash flow breakeven over GAAP profits for now.

Additionally, with a market cap in excess of $20 billion, Slack has now become an unattractive acquisition candidate. Tech behemoths had reportedly considered scooping up the start-up in recent years as its adoption spread like wildfire. Microsoft supposedly mulled an $8 billion bid in 2016 before CEO Satya Nadella nixed the idea, perhaps hoping to avoid some of his predecessor's mistakes while building competing Microsoft Teams for far cheaper. Even e-commerce giant Amazon considered buying Slack in 2017.

Getting taken out by a larger company is still possible, but much less likely at its current valuation. Slack will likely have to meet those optimistic hopes on its own.