Slack Technologies (WORK) and New Relic (NEWR) both offer services that simplify tasks for businesses. Slack's messaging and collaboration tools streamline communications between employees, and New Relic's cloud-based software tracks the performance of websites and apps.
Both companies are well-insulated from the COVID-19 crisis. Slack benefits from the shift toward remote work, and the crisis highlights the importance of New Relic's analytics tools. So which stock is the better overall investment in this volatile market?
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The differences between Slack and New Relic
Slack's platform, which is aimed at replacing traditional email and phone calls, runs on a freemium business model. The free tier serves small teams, while the paid tiers serve small, medium, and large businesses with richer features and support services.
Slack's primary competitor is Microsoft (MSFT 0.37%) Teams, which is bundled with the tech giant's other cloud-based software services. However, Slack can also be integrated into Microsoft's Office 365 services.
New Relic recently unified its analytics tools with New Relic One, a dashboard that helps businesses visualize all their website and application data. It serves customers across a wide range of sectors, including pandemic-resistant ones like gaming, e-commerce, and video conferencing.
Yet New Relic faces more direct competitors than Slack. Its growing list of rivals include Cisco's AppDyamics, Datadog, Dynatrace, and Splunk -- and that formidable competition arguably throttles its ability to raise prices.
How fast is Slack growing?
Slack's revenue rose 57% to $630.4 million in fiscal 2020, which ended on Jan. 31, but its net loss widened from $140.7 million to $571.1 million. On a non-GAAP basis, which excludes stock-based compensation and other variable expenses, its net loss narrowed slightly from $115.8 million to $113.4 million.
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In the first quarter of fiscal 2021, Slack's revenue rose 50% annually to $201.7 million, but its net loss widened from $33.3 million to $75.2 million. However, its non-GAAP net loss narrowed from $28.7 million to $13.3 million.
Slack's paid customers grew 28% annually to 122,000 during the quarter. Its net dollar retention rate, which gauges its growth per existing customer, rose 132%. Of those paid customers, 963 generated over $100,000 each in annual recurring revenue, up 49% from a year ago. Those growth rates indicate Slack is still locking in customers even as Microsoft aggressively expands Teams.
Slack expects its revenue to rise 42%-44% annually in the second quarter and 36%-38% for the full year, and for its non-GAAP net loss to narrow during both periods.
How fast is New Relic growing?
New Relic's revenue rose 25% to $600 million in fiscal 2020, which ended on March 31, but its net loss widened from $40.9 million to $88.9 million. On a non-GAAP basis, it posted a net profit of $39.7 million -- which was nearly flat from the previous year.
New Relic posted a dollar-based net expansion rate of 116% in the fourth quarter, and 75% of its annual recurring revenue came from paid business accounts generating over $100,000 in annual revenue -- up from 70% a year ago. Its total number of paid business accounts generating more than $100,000 in revenue grew 16% annually to 993.
During last quarter's conference call, New Relic CEO Lew Cirne acknowledged that higher investments made 2020 a "very challenging year" as it pivoted its customers toward New Relic One subscriptions, but noted the transition would set the foundations for long-term growth over the next few years.
New Relic expects its revenue to rise 12%-13% annually, but its non-GAAP net income could plunge 92% at the midpoint as it ramps up its investments. New Relic didn't offer any full-year guidance, but analysts expect its revenue to rise 12% this year as its earnings tumble 80%.
The valuations and verdict
Slack trades at about 25 times this year's revenue estimate, while New Relic has a forward P/S ratio of 6 and a forward P/E of over 320. Therefore, neither stock can be considered cheap relative to their growth rates.
Yet Slack is clearly the stronger investment, for three simple reasons: It's growing at a faster rate, it faces fewer direct competitors, and its non-GAAP net losses are narrowing.
New Relic's launch of New Relic One might differentiate it from its competitors while locking in customers, but its decelerating growth, rising expenses, and rising competitive threats make it a less appealing investment than Slack.
