Should You Buy Slack Technologies After Its Post-Earnings Plunge?

Shares of Slack Technologies (WORK) recently plunged after the collaboration software company posted its fourth-quarter numbers.

Its revenue rose 49% annually to $181.9 million, beating estimates by nearly $8 million but marking its slowest growth rate since its public debut last June. Its non-GAAP net loss narrowed from $30.4 million to $20.9 million, or $0.04 per share, which cleared expectations by two cents.

Those growth rates looked solid, but Slack's guidance failed to dazzle investors as the novel coronavirus pandemic hammered the broader markets. Let's dig deeper to see if investors overreacted, and if it's safe to buy Slack after its post-earnings plunge.

Image source: Slack.

How fast is Slack growing?

Slack was founded in 2009. Its eponymous platform helps employees stay in contact with each other via messaging and collaboration services. Slack's streamlined approach eliminated the external clutter of email and ensured everyone was on the same page.

Slack operates a freemium model and offers additional communication tools for paid users. Its billings and revenue growth remained robust over the past year.

Source: Slack quarterly reports.

Slack expects its revenue to rise 37%-39% annually in the first quarter, which narrowly misses the consensus forecast for 40% growth. It anticipates a net loss of $0.06-$0.07, which matches analysts' expectations.

Slack's revenue rose 57% in 2020, and it expects 34%-37% growth in fiscal 2021, with a net loss of $0.19 to $0.21 per share. Analysts had expected 36% revenue growth with a slightly wider loss of $0.22 per share.

Slack's slight miss in its first-quarter guidance would have likely been overlooked in a bull market, but the unforgiving bear market mauled the stock. However, Slack's full-year guidance looked healthy, and demand for its remote collaboration services should rise as more employees work from home throughout the crisis.

Growth in all the right places

Slack's total number of paid customers rose 25% annually to 110,000. Of those customers, 893 spent more than $100,000 annually, up 55% from 645 last year, and those larger customers accounted for 47% of its fourth-quarter revenue -- up from 41% a year earlier.

Image source: Slack.

Slack expects that percentage to continue rising as it courts bigger customers. At the high end of the market, its customers with annual recurring revenue of more than $1 million grew 79% to 70. It posted a net retention rate of 132%, which indicates that it's generating higher revenue per existing customer.

Those growth rates, which included the addition of 1,800 users it gained from its acquisitions of Stride and HipChat Cloud's IP from Atlassian, indicate that Slack isn't losing ground to bigger rivals like Microsoft (MSFT -1.27%) Teams.

In addition to Atlassian, Slack holds partnerships with Okta, Zoom, and Box, which all provide remote collaboration tools. Using these smaller services could be an attractive option for companies that don't want to tether themselves to a big tech company like Microsoft.

Slack also plans to integrate its platform into larger services -- including Microsoft Teams, Cisco's Jabber, and Amazon Chime -- in the first half of 2021. Those new connections could expand Slack's reach across the enterprise market.

Slack's non-GAAP gross margin also expanded 120 basis points annually to 88.3% during the quarter, and its non-GAAP operating loss narrowed from $37.5 million to $23.1 million. Those improvements indicate it still has pricing power in the growing collaboration market, and it's tightening up its spending as it expands.

But is it safe to buy Slack Technologies?

Slack still has room to grow, but its stock isn't cheap at 11 times this year's sales. The company seems naturally insulated from the coronavirus crisis, but CEO Stewart Butterfield warned that it was still "too soon" to gauge the full impact of the pandemic.

I believe Slack could head much higher over the next few years, but it could be extremely volatile over the next few weeks and months. Investors can consider nibbling on the stock after its latest pullback, but they should remember that bear markets can be brutal for unprofitable companies with lofty valuations.