Software-as-a-service (SaaS) platforms provide incredible functionality for users with an asset-light model that provides a great opportunity for investors. SaaS companies Shopify (SHOP +3.29%) and Slack Technologies (WORK +0.00%) have both attracted a huge customer following and are investing heavily to grow, but the software offerings couldn't be more different. Shopify makes it easy to run e-commerce stores, and Slack is a messaging platform that is out to make email obsolete.
Shopify's stock has been on a tear since its IPO and has likely made many shareholders millionaires. Slack's stock is down from its public debut and has yet to break out with any significant gains. Which is the better buy today?
Stock prices since IPO through May 19, 2020. SHOP data by YCharts.
Let's look at the key metrics and consider the case for both to decide.
Key metrics for two SaaS specialists
Shopify first released its software to customers eight years prior to when Slack's messaging platform was available to customers, and it came to the public markets almost four years earlier. This head start has helped Shopify become the larger and more established company with 2.7 times the revenue, 3 times the cash, and 5 times the market capitalization.
|
Metric |
Shopify |
Slack |
|---|---|---|
|
Year software first available for customers |
2006 |
2014 |
|
Initial public offering date and price |
May 21, 2015 $17.00 |
June 20, 2019 $38.50 |
|
Market capitalization |
$90 billion |
$18 billion |
|
TTM revenue |
$1.7 billion |
$630 million |
|
TTM net income |
($132 million) |
($571 million) |
|
MRQ revenue growth |
47% |
49% |
|
Cash and cash equivalents |
$2.4 billion |
$769 million |
|
Stock gain / (loss) since IPO |
4,429% |
(23%) |
Data sources: Wikipedia, Yahoo! Finance, and Crunchbase. Stock prices as of May 19, 2020, market close. Table and stock price return calculation by author.
It's also impressive to note that the e-commerce platform is still growing at a 40%-plus rate similar to the smaller messaging company. Let's take a look at this e-commerce powerhouse.
The case for Shopify
Shopify provides the software tools to allow entrepreneurs, small businesses, and larger enterprises to run e-commerce stores. It handles everything including website setup, inventory management, payments, marketing, customer support, and even manages sales through other online marketplaces such as Amazon and Etsy. The software is so advanced that a seller can run their entire enterprise from their mobile phone.
In 2014, the year prior to its IPO, merchants sold $3.8 billion worth of goods online using the platform. Just five years later, sellers moved $61.1 billion in goods in 2019, a 16 times increase, which has put Shopify in second place behind Amazon in terms of e-commerce market share in the U.S. It's a seller-friendly platform preserving the seller's brand and making most of its revenue from transaction fees as merchants make sales. Shopify's mission is to make e-commerce better for everyone, and its investments focus on making it as easy as possible for merchants to run their businesses.
Shopify has a model that's similar to Amazon's virtuous flywheel. With a tailwind of e-commerce growth, more merchants move to the platform, which attracts more buyers and more developers to improve the platform. As the platform improves, it attracts more merchants, and its flywheel spins faster, driving growth for years to come.
Image source: Getty images.
The case for Slack
Slack's business can be described simply as a messaging platform that's an email replacement, but it's much more than that. It integrates with over 2,000 other software tools, making it a hub for employees to manage just about anything from their Slack screen. Its 12 million daily active users spend around 9 hours a day connected to the software and 90 minutes actively using the features. Users love the software, and so do the 110,000 companies paying the bills. It boasts a dollar-based revenue retention rate of over 130% for every quarter it's been a public company.
The company has seen a surge of new paid usage from companies scrambling to adapt to its employees becoming a remote workforce practically overnight. But so has its biggest rival, Microsoft. Slack CEO and founder Stewart Butterfield argues that its platform is superior, but regardless of which is the better software, the takeaway is that this market is huge. Just one look at your email inbox based on 50-year-old technology, and you know there's got to be a better way. Slack's opportunity is every single business email user around the world, which gives it a long runway of growth ahead.
There's a better buy, but not without some risk
There's no beating around the bush: These two SaaS growth companies have lofty valuations that would make any value investor run the other way. Since neither company is profitable, let's compare their price-to-sales ratios. Slack has a premium P/S ratio of 20, but Shopify's is a nosebleed 50. However, investors should also know that each company carries some risk. Shopify is highly dependent on small businesses that could take it on the chin with an extended recession, and Slack is competing with a deep-pocketed 45-year-old software juggernaut that likely won't go away anytime soon.
Shopify is the established market leader, has tremendous momentum, and is closer to profitability. You can't say the same for the anti-email messaging platform; it's still early in its journey as a public company, and the future is more uncertain. Even with its higher valuation, five to 10 years out, Shopify should provide investors a better return and is the better buy today.
Editor's note: Slack's IPO date has been corrected.
