Slack (WORK) CEO Stewart Butterfield keeps telling investors not to worry about the competitive threat that Microsoft (MSFT -3.58%) poses, but those messages seem to be falling on deaf ears. Slack shares sold off yesterday on news that Microsoft Teams had hit 20 million daily active users (DAUs), up from 13 million DAUs in July and topping the 12 million DAUs that Slack reported in September.

To be clear, user metrics for the enterprise chat platform are undoubtedly important, but investors may be focusing too much on those figures.

Slack app interface on Mac

Image source: Slack.

Not all users are equal

First of all, it's worth noting that Slack users and Teams users aren't necessarily mutually exclusive. In some cases, organizations have both platforms deployed. "There's still a lot of people choosing Slack, despite the fact that they have Teams bundled in for free," Butterfield said at a tech conference last month. Slack also works well with Office 365, with 70% of Slack's top 50 customers using Microsoft's ubiquitous software suite alongside Slack integrations.

Additionally, Microsoft is using a variety of tricks to pad its Teams numbers, such as launching the Teams app when a work computer is turned on. Slack has said that its users are far more engaged, which the company believes is more important to what really matters: productivity and collaboration.

Show me the money

There is room for both Slack and Microsoft to succeed. The enterprise collaboration market is expected to grow from $31 billion in 2019 to $48.1 billion in 2024, according to MarketsandMarkets. The two companies will inevitably compete for those dollars, but the overall pie is expected to grow at a compound annual growth rate of 9.2% over the next five years.

That's why investors should instead be focusing on Slack's financials. Like other software-as-a-service (SaaS) companies, familiar metrics like net dollar retention rate and the number of large customers are critical indicators of Slack's strength. The good news is that these metrics remain at healthy levels, even as net dollar retention rate declines due to Slack's growing revenue base.

Chart showing Slack's net dollar retention rate

Data source: SEC filings. Chart by author. Fiscal quarters shown.

"Our Net Dollar Retention Rate has declined year over year as our base of revenue has grown and our penetration within existing, long-term Paid Customers has increased," Slack notes in regulatory filings. As long as net dollar retention rate stays above 100%, that means the company is successfully upselling enterprise customers.

Slack now has over 100,000 paid customers, of which 720 generate over $100,000 in annual recurring revenue (ARR). As might be expected, those big spenders disproportionately carry the top line.

Chart showing the number of Slack's paid customers generating more than $100,000 in ARR

Data source: SEC filings. Chart by author. Fiscal quarters shown.

These metrics are far more important than DAUs. Slack presumably agrees, as it doesn't even consider user metrics important enough to disclose on a regular basis alongside quarterly earnings. That's not to say that Slack's overall financials are stellar; the company still operates at a loss, free cash flow remains negative, and CFO Allen Shim has framed its path to profitability as a "multiyear" journey as Slack continues to invest heavily in growth.

But user metrics alone, without detailed context around engagement or monetization -- only half of Slack's DAUs are paid seats -- don't say a lot.