Dan Romanoff: We see no-moat Slack as an interesting niche technology company that is more evolutionary than revolutionary. The company offers a collaboration platform focusing on chat that positions itself as a replacement for email.
Shares have come down sharply since the company’s direct listing in June when it closed at $39 per share. Our fair value estimate is $14, so we see more downside still. We would recommend investors look elsewhere as there are better opportunities and risk/reward trade-offs available to them in the software space. We understand why investors are attracted to the stock. After all, there are only so many companies that can grow revenues at faster than 50% at Slack’s size. We find ourselves generally in line with broader Street expectations for growth and margins in the near term but are more cautious on the competitive environment over the medium and longer term.
In particular, we are concerned by competitive pressure from Microsoft, with their similar collaboration solution, Teams. Microsoft gives Teams away for no additional cost in its Office 365 suite and is already present on tens of millions of enterprise desktops, with a funnel of tens of millions of more desktops. We think these will be difficult to overcome in the long run. In fact, Teams already has more daily active users than Slack despite Slack being available for at least six years, versus just two years for Teams. We also have concerns around the company’s free cash flow generation, which despite generating $401 million in revenue last year, was still at negative 24% free cash flow margin. We think SaaS companies at this scale, especially those with a low touch model, should generate more cash at this stage of their life cycle. Further, we model several years of cash burn still.
While the rapid topline growth is enticing and the technology is novel, we nonetheless think shares are overvalued and would encourage investors to consider other software stocks.
