Slack’s Market Message: A direct listing is coming
April 29, 2019 | Blog

Slack’s Market Message: A direct listing is coming

Slack, the workplace messaging platform, has given investors their first deep-dive view into the company. Unlike other tech IPOs in 2019, Slack is pursuing a direct listing. This public offering route differs from a traditional IPO: no funds are raised, but no underwriter fees are incurred. Spotify took this listing route last year, will Slack be as successful?

#Growth

At first glance, Slack has impressive growth. Revenue grew at a healthy 82 percent over the last fiscal year, while growing gross profit by 80 percent. Conversely, losses from operations grew a modest 7 percent over the same period. The firm grew paying users at a compounded annual growth rate (“CAGR”) of 54 percent over the last three years. In other words, paying customers more than doubled from 37,000 at the end of fiscal 2017 to 88,000 at the end of fiscal 2019. Large paid accounts experienced a CAGR of 106 percent over the same period. If Slack can maintain the growth they have seen in paying users, we believe Slack could become positive on an operating margin basis.

Large and Diverse Customer base

Slack has 600,000 organization-level users, 88,000 of which are paying customers. At the individual level, those 600,000 organizations make up the 10 million daily active users. Paying customers are defined as those companies that pay for three or more user licenses. We believe the firm is positioned for continued potential growth. Even at the free subscription level, an organization’s switching costs to use a separate software are relatively high. As such, Slack is in a position to maintain that user base if it stays ahead of competitors. Additionally, continuous improvements to the paid version of the platform will inherently increase the likelihood of conversion from free users to paid ones.

Moreover, we view the fact that Slack currently has 575 paying customers representing contracts over $100,000 of annually recurring revenue as another data point to this facet. These large enterprise customers represented around 40 percent of total revenue in fiscal 2019. If Slack is unable to attract similar large enterprise customers, their profit potential could face significant headwinds.

Cash on hand sufficient

At the end of January 2019, Slack had about $861 million worth of cash, cash equivalents, and marketable securities on hand – a sign that the firm has ample runway, despite its intent to not raise funds in its upcoming public debut. Slack had operating cash outflows of $97 million. If they experience similar or decreased cash burn in years to come, the company may not have to dip into investor pockets.

A direct listing comparison to Spotify

The fact that Slack is pursuing the non-traditional method of directly listing its shares to public markets warrants a look at the last private technology growth company to do so, Spotify. The comparison between Slack and Spotify should be taken with a grain of salt given the differing service offerings they provide.

By multiple measures, Slack is growing faster now compared to Spotify when it initially filed. In the three-year period prior to its public filing debut, Slack experienced significantly lower growth in both operating expenses and loss from operations compared to Spotify. These firms clearly operate in different industries, but rely on a subscription-based revenue business model.

Losses and Negative Free Cash Flow will likely continue

We must note that Slack currently experiences high losses. Free cash flow was positive only once in the last twelve quarters. Slack has controlled losses from operations quite well– growing only 4 percent since fiscal 2017. Investors in the direct listing will likely look for how Slack plans to increase the proportion of users that pay for its service, or at the very least that they can reach a scale that generates free cash flow on a regular basis.

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CONFLICTS

This report is distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

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DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.

Alejandro Ortiz

Alejandro Ortiz

Alejandro is a Research Analyst, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, he was a Valuation Analyst at Duff & Phelps with a focus on TMT industries.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own financial advisors before making any investment decisions. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about the subject matter therein, including all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be during their employ directly or indirectly related to their specific views contained in this report.

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.