Slack Technologies (WORK) has been a divisive stock since its direct listing last June. The bulls claimed Slack's collaborative platform would disrupt the traditional email and messaging markets and change how people worked. The bears claimed Slack's moat wasn't wide enough to fend off rivals like Microsoft (MSFT 0.46%), and that it lacked a long-term path toward profitability.
The bulls initially lifted the stock from its debut price of $26 to the high $30s, but it subsequently stumbled back to the high $20s -- even as stay-at-home measures boosted interest in the stock. Slack certainly faces a lot of near-term challenges, but will its stock climb higher over the next five years?
What do the bears think about Slack?
Slack's revenue rose 110% in fiscal 2018, 82% in 2019, and 57% in 2020. In March, it estimated its revenue would rise 34%-37% in fiscal 2021, which ends next January. Slack's growth remains robust, but the bears believe its revenue growth could peak before it ever generates a profit. Slack expects its non-GAAP net loss to narrow from $0.28 per share in 2020 to $0.19-$0.21 in 2021, but its GAAP net losses -- which include big stock-based compensation (SBC) expenses -- could still widen.
On a GAAP basis, Slack's net loss widened from $138.9 million in 2019 to $568.4 million in 2020. SBC expenses, as a percentage of its revenue, jumped from 6% to a whopping 68% as the company expanded its workforce and subsidized salaries with big stock bonuses. That percentage should decline in 2020, but it highlights Slack's dependence on stock bonuses as it attempts to expand with negative cash flows.
Moreover, Microsoft recently revealed that its answer to Slack, Teams, had reached 75 million daily active users -- up from 44 million in March. Slack hasn't updated its daily active user count since last October (when it reached 12 million), and only recently revealed its platform hosted a peak of 12.5 million concurrent users in late March.
Microsoft is bundling Teams with its other Office 365 services, and that aggressive strategy -- which leverages its dominance of PC operating systems and productivity software -- could hurt Slack. Microsoft was reportedly interested in buying Slack four years ago, but it clearly believes it can crush it instead.
Slack's stock also isn't cheap relative to those of its peers. The stock trades at about 18 times the midpoint of its revenue forecast for fiscal 2021, and its slowing revenue growth, widening GAAP losses, and narrowing moat all make it tough to justify that premium.
What do the bulls think about Slack?
The bulls believe Slack's revenue growth will stabilize as it grows its base of larger customers. It also recently expanded its user base by acquiring Stride and HipChat Cloud from Atlassian.
Last quarter, Slack's total paid customers grew 25% annually to 110,000. 893 of those customers generated over $100,000 in annual recurring revenue, up from 645 a year earlier. 47% of its revenue came from those larger clients, up from 41% last year.
Slack CEO Stewart Butterfield recently dismissed the notion that Microsoft was a serious threat during a CNBC interview, noting that less than 30% of Microsoft's Office 365 users were using Teams. That percentage could rise, but it also suggests that there are still plenty of companies that don't wish to be tethered to Microsoft's ecosystem. Moreover, Slack's platform is already integrated with most of Microsoft's Office apps.
Slack's non-GAAP gross margin also expanded last year, which indicates it still has pricing power, and its free cash flow -- while negative -- is improving. Therefore, Slack's GAAP losses could eventually narrow as it weans itself off its dependence on stock bonuses. Slack was still holding $767 million in cash, cash equivalents, and marketable securities at the end of 2020, with zero debt -- so it won't be run off the road by Microsoft anytime soon.
Last but not least, Slack remains an attractive takeover target for other companies. Slack's valuation and enterprise value of $14 billion are a bit high, but cash-rich tech giants like Amazon, Cisco, and Alphabet's Google -- which all offer remote collaboration platforms -- could still be interested.
So where will Slack be in five years?
I believe the bear case against Slack is slightly stronger than the bull case. Slack's CEO might publicly dismiss Microsoft Teams as a rival, but its SEC filings clearly list Microsoft as its "primary competitor."
Slack's revenue growth will likely decelerate over the next five years, and it could struggle to narrow its losses while widening its moat. It could also be forced to issue debt or secondary stock offerings to maintain its cash flow. Those challenges, along with Slack's frothy valuation, could cause its stock to tread water and underperform other tech stocks over the next five years.