Slack Technologies will be completing its much-anticipated direct listing on June 20. Beyond the attention the company will receive due to its status as a Silicon Valley darling, Slack’s transition to the public marketplace is important because it will arrive via a direct listing, marking the first of 2019 and the only such event for a unicorn company since Spotify’s direct listing last year. We recently outlined the details of a direct listing in our Slack Company Report. While a direct listing can be considered risky for a variety of reasons, Slack may benefit substantially from the interest public investors have shown in enterprise software-as-a-service (“SaaS”) companies. In fact, the ten SaaS and cybersecurity companies that have completed IPOs over the past twelve months are trading on average 90 percent above their IPO prices, with performance ranging from increases of 14 to 185 percent. This segment includes companies such as Zoom, CrowdStrike, Elastic NV, and Tenable. We’ll have to wait and see if Slack performs in line with the rest.
The day before Slack begins trading, the NYSE — in conjunction with Slack’s advisors — will announce its final reference price. Slack disclosed its recent history of private secondary transactions in the firm’s registration documents. Amongst a variety of other factors, those trades may influence the ultimate price chosen. In May 2019, the most recent time period disclosed, the volume-weighted average price paid for Slack shares was $26.82. Given that the share price during the company’s Series H round was $11.91 in August 2018, it appears private investors believed Slack’s valuation warranted significant appreciation in the subsequent nine months.
For direct listings, one significant risk is illiquidity, given that book-building activities will be occurring as soon as markets open, though this risk is somewhat mitigated by the strong performance of recent SaaS IPOs. The absence of a potentially notable pop, as seen with traditional IPOs, may also hamper Slack’s retail demand. Another concern with a direct listing is insufficient demand for the company’s shares once it begins trading, given a lack of substantial marketing and no formal allocation of shares associated with traditional IPOs. Additionally, with no 180-day lock-up period for existing shareholders, there is an increased chance of substantially more supply than demand for Slack’s shares. All of this could result in heightened volatility in the early hours and days of trading. The only reference point we have for unicorn direct listings is Spotify’s 2018 listing, for which opening day trading volume represented approximately 19 percent of eligible shares outstanding. Given the relative success of Spotify’s listing, we’ll look to see if Slack can achieve the same level of liquidity. As illustrated in the chart below, after opening 25 percent above its reference price, Spotify’s daily volatility remained within +/- six percent for the following sixty days. It seems that — at least for Spotify — dramatic volatility was a concern that did not come to fruition.
While the primary focus this week will be upon how Slack’s direct listing fares, it’s important to note that this event is more representative of a first step down the long road of being a publicly traded company. As such, the need to achieve profitability may be accelerated, as public investors could be less patient than private ones. Furthermore, any perceived or real loss of competitive advantage or market share to competitors, both large and small, may substantially affect the company’s share price and associated valuation nearly immediately. To more aptly track these and other considerations, we’d suggest following the company, its future earnings calls, and associated guidance.
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