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3 Analysts Start Slack at Buy

By Evan Niu, CFA - Jul 15, 2019 at 2:54PM

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All three advised Slack for its direct listing.

Slack ( WORK ) is kicking off the week by getting bullish ratings from three separate Wall Street analysts. William Blair, Canaccord Genuity, and Barclays all initiated coverage on the popular enterprise messaging service with buy ratings (or the equivalent). Shares had been trending lower ever since trading commenced last month following its direct listing, a historically rare way for companies to go public.

Here's what investors need to know.

Slack app interface on Mac

Image source: Slack.

Slack's addressable market could be bigger than you think

William Blair analyst Bhavan Suri is encouraged that Slack already has 645 paying customers that each generate over $100,000 per year in annual revenue. This figure, an important metric in the software-as-a-service (SaaS) world, has been steadily climbing.

"Slack serves as an operating system for modern enterprises by enabling users to bring other applications' functionalities and data into Slack without leaving their primary work space," Suri wrote in a research note to investors. "We believe Slack will replace or severely displace email over the next several years."

In its prospectus, Slack estimates its total addressable market for enterprise communication and collaboration is roughly $28 billion. Suri believes that the addressable market is far larger, at $46 billion. William Blair did not assign a price target on Slack shares.

An "inexorable adoption curve"

In Canaccord Genuity's initiation, analyst Richard Davis praised Slack's intuitive interface and user-friendliness. "Slack has the most advanced, easiest to use, and most integrated to other applications real-time chat engine in the market," according to Davis. While acknowledging Slack's lofty valuation metrics, Canaccord Genuity believes that the company is putting up "[b]est-in-class metrics" and will likely enjoy an "inexorable adoption curve."

"There is little arguing the fact that Slack sports the financial metrics that warrant a premium valuation," the analysts wrote. "With high gross margins and a clearly sticky product, we're quite confident that this will grow to be a 30%+ (free cash flow) margin business with scale."

Canaccord Genuity assigned a $40 price target on Slack shares.

A Street-high price target

Rounding out the trio today is Barclays analyst Raimo Lenschow, who believes that Slack has a clear shot at replacing email in the workplace. The analyst thinks that Slack is different because it is "creating its own market" instead of simply improving existing applications.

"If successful, this would create a new, very large market (millions of email users) enabling Slack to be one of the very large, future software leaders -- hence our excitement on this name," wrote Lenschow. Barclays assigned a $45 price target, which is now the highest on the Street.

It's worth noting that all three of these investment banks served as associate financial advisors for Slack's direct listing, according to the prospectus. Slack paid $22.1 million total in fees to its financial advisors and associate financial advisors in connection with going public.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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