Better Buy: Slack Technologies vs. Zoom Video Communications

Slack Technologies (WORK) and Zoom Video Communications (ZM -2.25%) are both weathering the COVID-19 pandemic better than the broader market. Slack's stock rose roughly 25% since the beginning of 2020, while shares of Zoom surged more than 120%.

Both companies benefit from stay-at-home measures. Slack's communication platform connects employees with messaging and collaboration services, and Zoom's video conferencing and remote collaboration tools have gained momentum with both enterprise and mainstream users. But is either stock still worth buying after their recent rallies?

Image source: Getty Images.

The differences between Slack and Zoom

Slack's basic service is free. Its paid tiers add additional perks, including unlimited message archives, unlimited apps, group calls, guest accounts, and designated customer support teams.

Its standard tier for small to medium-sized businesses costs $6.67 per person per month when billed annually, while its Plus tier for larger businesses costs $12.50 per person per month. It also offers an Enterprise Grid tier for "very large" businesses.

Unlike Slack, which is designed as a replacement for traditional emails and memos, Zoom's platform is designed for large group meetings. Zoom's free tier allows users to host remote meetings of up to 100 people for up to 40 minutes at a time.

Its paid tiers cost $14.99 to $19.99 per host per month, based on the size of the organization. Paid subscribers gain access to larger and longer group meetings, more cloud storage, better customer support, and other perks.

Which company is growing faster?

Both companies went public last April, but Zoom is growing at a much faster rate than Slack.

Source: Slack quarterly reports.

Slack's number of paid customers grew 25% annually to 110,000 last quarter. Its number of customers with over $100,000 in annual recurring revenue rose 55% and accounted for 47% of its revenue, up from 41% a year earlier.

However, Slack expects its revenue to rise just 37%-39% annually in the first quarter. That forecast, which missed expectations for 40% growth, sparked concerns that Slack was losing ground to bigger rivals like Microsoft Teams -- which recently reported surging usage rates throughout the crisis.

Zoom didn't disclose its exact number of paid customers last quarter, but it stated that its total number of customers with over $100,000 in annual revenue rose 86%. It also stated that its number of customers with over ten employees grew 61% to 81,900.

Zoom expects its revenue to rise 63%-65% annually in the first quarter, which easily beats expectations for 53% growth. That outlook was encouraging, but Zoom also faces growing competition from rivals like Cisco's Webex and Tencent's VooV Meeting.

A series of security blunders also recently sparked questions about Zoom's ability to scale its business, and caused several major customers to ban the platform. The bulls think those missteps are merely growing pains, but the bears believe they're exposing its Achilles' heel to the competition.

Image source: Getty Images.

Which company is more profitable?

Slack is deeply unprofitable, as the costs of hosting, promoting, and expanding its services consistently offset its revenue from paid subscribers. Its net loss widened from $140.7 million in 2019 to $571.1 million (from revenue of $630.4 million) in 2020.

On a non-GAAP basis, which excludes its stock-based compensation expenses and other one-time expenses, Slack's net loss only narrowed slightly from $115.8 million to $113.4 million. It expects to remain unprofitable by both measures this year.

Zoom generated a net profit of $21.7 million from revenue of $622.7 million in 2020, compared to a break-even profit in 2019. On a non-GAAP basis, its net profit surged more than six times to $101.3 million. Zoom expects its non-GAAP EPS to rise 20%-29% in 2021.

Neither stock is cheap at current levels. Slack trades at 16 times its revenue estimate for 2021. Zoom trades at 42 times its revenue forecast and nearly 350 times its earnings forecast for 2021.

The better buy: Zoom (but only on a pullback)

The COVID-19 crisis lit a fire under Slack and Zoom, but I wouldn't chase either stock at these frothy levels. Slack still needs to narrow its losses while fending off competition from Microsoft and other well-funded competitors, and Zoom must resolve its snowballing security issues before they permanently tarnish its reputation.

But if Zoom addresses those issues in a timely manner, it would arguably be a better buy than Slack -- but only after its valuations cool down. At current levels, Zoom is trading like a cult stock. Investors can consider nibbling on Zoom up here, but they should wait for a deeper pullback before accumulating more shares.