Hugely popular workplace chat app, Slack, are about to go public, having filed in February, so it’s high time for a good ol’ Freetrade analysis. We plan to add stocks like Slack to the app, and you can find out more about the app here.
Who are they?
Slack is an enterprise software company launched in 2013 by Flickr founder Stewart Butterfield.
Butterfield’s an interesting entrepreneur: both Flickr and Slack emerged from what should have been gaming companies. Slack began as the in-house team messaging app for his MMORPG developer Tiny Speck. After realising the utility of their tool (and that the game was going nowhere), they pivoted to developing and selling the app to other businesses.
What do they do?
Slack develops and maintains a band of cloud-based collaboration and communication tools for working teams. Its eponymous app is the most popular work-focused chat software.
If you haven’t used it (and if you work in any office-based job, you really should), it’s built around a direct message platform that looks like this:
As well as messaging team-mates and teams on various channels, users can integrate services like Twitter or Jira to create a single stream of activity and updates.
A lot of tech companies and startups use Slack as their central communication hub.
Slack uses a freemium model where its basic software is free, while extras features including unlimited integrations and more search history are paid.
Unlike a lot of enterprise software companies, if you’re on a paid plan, Slack charges per active user, rather than by seat.
Firstly, don’t call it an IPO
While the expectation is that Slack will go public, it won’t use an IPO. Like Spotify, it looks like Slack will go for a direct listing.
An IPO, initial public offering, is a specific way of going public. It means:
- New shares in the company are created
- Underwriters (big institutions like investment banks who agree to take on some of the shares) are engaged
- They help with pricing, organisation, regulatory matters and other admin
- Those underwriters work with the company to sell those new shares
- The underwriters get a cut on the share sales for their work
- And the company uses the rest of the proceeds as new funding
IPOs are expensive for the companies that undertake them. However, they do mean that the company gets new investment and gets plenty of help from underwriters to sell the shares.
Now for direct listings AKA direct public offerings
In a direct listing, a company sells shares directly to the public without using underwriters to organise and secure the offering.
There’s a bit of ambiguity out there on direct listings and direct public offerings. In some cases (like Ben and Jerry’s in the eighties), the company sold directly to the public without underwriters. However, they also created new shares to raise money for the company: much like an IPO but without underwriters.
In others like Spotify in 2018, the shares become publicly available but no new shares are created and no new investment is put into the company: like flicking a switch from private to public. These are important differences.
Slack is expected to follow Spotify’s example and just list their shares without raising any new money from the public.
In a non-capital-raising direct listing, the company just converts itself and its shares into public form and current shareholders can sell them to any interested public investors. No new money is raised because no new shares have been created. The company has just been put on the public market.
With this kind of direct listing, no new capital is raised for the company but the positives include:
- No dilution for current shareholders
- No underwriter taking a cut (or providing their services either)
- No lock-up period preventing current shareholders from selling
In other words, you get liquidity - existing shareholders can now sell to the public market - but no new investment in the company from the public.
So a direct listing could make more sense for companies that are comfortable with their current funding and are confident they have enough interest to sell shares without the help of an underwriter.
This could suggest that Slack feel they’re in a strong financial position without extra capital.
As above, traditional IPO’s often involve a lockup preventing insiders cashing out and potentially sending the stock price down. A direct listing usually doesn’t, so there could be some serious volatility in Slack’s first few weeks as a public company if vested employees sell a lot of shares.
Financials for Slack are pretty thin on the ground, meaning that until a proper prospectus is launched, figures have to be gleaned from various media reports and the more limited financials they issue as a private company.
Recent numbers show:
Growth continues apace
Slack has been called the fastest growing enterprise software ever and indeed the service has achieved remarkable growth and equally remarkable enthusiasm.
However, not only is Slack growing in users, they’re also growing in ARR - annual recurring revenue. Recurring revenue is like regular revenue, but even better because once it starts, it’s really hard to stop. Like a zombie plague or pringles.
Crunchbase is currently projecting a $350m ARR for 2018, up from $200m in 2017. That’s 75% growth in 1 year.
With Slack riding high as an enterprise tech darling, there’s been a lot of chatter about potential acquisitions by Amazon or Microsoft (among others).
Actually Microsoft were apparently on the verge of an $8B acquisition in 2016, before being steered away by Bill Gates and CEO Satya Nadella in favour of improving their Skype service instead. Good call, guys. Remember Skype?
However, Microsoft may be even less interested in an acquisition now that their competing Microsoft Teams app is growing very fast (see below).
In any case, an acquisition could still happen once Slack goes public. However, it seems less likely that insider shareholders and VCs would support it, once they have the opportunity to cash out via the markets.
So Slack seems to have a great business - a simple, popular product, strong revenue growth and potential appeal as an acquisition.
What are the potential negatives in the Slack story?
Profits may not be as instant as their messages
Despite increasing revenues, being founded in 2013 and having few if any physical costs, Slack still aren’t profitable. This isn’t too unusual for SAAS tech companies as they tend to spend a lot of money acquiring new users.
Slack aren’t known for having a particularly high burn rate. The fact that they’re not pursuing a traditional IPO could suggest they’re comfortable with their current funding to cover losses for now.
Nonetheless, if you’re after dividends or just the business proof of an annual profit, it doesn’t look like Slack will be prioritising either for some time.
Open to competition
While Slack is the original innovator in the space, that hasn’t kept it ahead of the competition. Microsoft described their Teams app as the fastest growing business app in history and that claim is credible.
According to data from Spiceworks, Microsoft Teams is now ahead of Slack in market share, with 21% to Slack’s 15%. Skype is on 44% - but Microsoft plans to transition Skype users to Teams soon, which will leave Teams in a commanding position.
The fact is the technology behind instant chat is pretty trivial, meaning that new competitors can enter the market without much lead time.
In addition, unlike many other comms platforms, Slack’s heavy focus on communication within workplaces limits potential network effects. Although scale helps promote awareness and word-of-mouth (if you use Slack at, you might recommend it at your next job), it isn’t a moat in the way it is for data or network-based companies like Google or Facebook.
Adoption is pretty much driven by brand and convenience. Slack does have a good brand (they were Inc’s company of the year in 2015), have avid fans and no classic tech company scandals. However, for convenience, Microsoft Teams (which comes free with Office 365) wins out for businesses that already use the Microsoft software suite. And despite an entrenched position as the legacy leader, Office is actually gaining market share.
When Teams launched, Slack responded by deepening its integrations with Google, whose own Hangouts app is languishing. If G-Suite were crushing Office, this may provide some succour. However, Office’s continued strong performance means that Slack + G-Suite may not beat Office + Teams.
One underlying issue is that instant chat, while a growing enterprise tool, is already commoditised. A lot of businesses care more about their whole productivity suite and will just use whatever chat tool works best with that.
There are plenty of cool startups out there that would rather lose their beer fridges than use Office and Teams. But in terms of headcount, there are far more employees in large organisations, many of which use Office. The big market for enterprise chat could well be based on winning over those companies.
The Last Word
So how does Slack look as an investment?
Slack have a great brand and an excellent product, which they’re clearly able to monetise effectively. They’re the cool kid in a growing space. And if you want to just invest in a company pursuing business chat specifically, rather than any big enterprise software company, they’ll be the only public option for some time.
The big question is the competition. Microsoft Teams can do most of what Slack can do, integrates with Office and makes a lot of sense for anyone already using Office. Despite being a much larger, diversely focused company, Microsoft have grown the Teams market share beyond Slack’s in less than 2 years.
It’s not hard to imagine another competing service launched by Amazon for AWS customers either.
Slack may have had the first word in enterprise chat, but they may not have necessarily have the last.
When it comes to investing, the choice, as always, is yours.
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