Shares of Slack Technologies (WORK) stormed out of the gate on its market debut on Thursday, opening at $38.50, far higher than the reference price of $26 set for it by the New York Stock Exchange the day before. The company took an unconventional path to public trading, opting for a direct public offering (DPO) or direct listing rather than the more-often-chosen initial public offering (IPO).
The stock climbed as high as $41.85 on its opening day before closing at $38.62 and ending the day with gains of 48.5% from the NYSE reference price (but just 0.3% from its opening trade price). Thursday's closing price valued the company at $19.5 billion, nearly three times its most recent valuation of $7.1 billion as a private company.
So why did Slack jump on its market debut? Let's take a look at three possible reasons.
1. It didn't need to raise capital
Most companies choose the traditional IPO process to go public, giving them the opportunity to sell new shares to the public and raise capital to fund the next stage of the company's growth. Slack chose the DPO because it didn't need to raise funds, as the work collaboration and messaging company has been financing its growth from its current operations. The company currently has about $793 million on its balance sheet, according to recent regulatory filings.
Choosing the DPO path to public trading also saves millions in listing fees and allows company insiders and early investors to sell shares without having to endure the 90- to 180-day lock-up period that typically accompanies an IPO.
2. Slack's financial results are solid
While Slack is not yet profitable, the company is growing quickly, and its financial results show enormous potential. Last week, the company reported the results of its fiscal 2020 first quarter (which ended April 30), which gave investors a boost in confidence.
The company generated revenue of $134.8 million, an increase of 67% year over year. Slack's GAAP operating losses came in at $38.4 million or 28% of total revenue, compared to a loss of $26.3 million or 33% of revenue in the prior-year quarter. The bottom-line result was a net loss of $31.8 million, about 28% worse than the $24.9 million loss in the year-ago quarter. This illustrates that the company is not yet profitable but continues to fund its growth from current operations.
3. A path to profitability
Unlike some recent IPOs, Slack's rapid revenue growth and manageable losses show that if the company continues on its current trajectory, it could soon produce a profit. Other recent IPOs, like ride-hailing rivals Lyft and Uber, are losing billions of dollars every year with no end in sight. Prices for both stocks plummeted soon after their market debut, though Uber has since regained some ground.
This illustrates that investors are getting more cautious about new issues that aren't generating a profit and are hungry to invest in a newly minted company that has a chance of moving beyond mounting losses with a clear path to income generation.