Breaking Down Slack’s Valuation: An Interactive Analysis

by Trefis Team
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Slack recently reported its latest performance figures, with the technology company hitting 3 million paying customers for its services out of a reported aggregate base of 8 million total customers. This is a major improvement from September last year, when the company reported 6 million customers, of which 2 million were paid customers. Slack is a cloud-based technology company that allows customers to use its online platform and app for business communication, file sharing and messaging, which is mainly used by teams in work environments. The company’s continued push into the enterprise space has helped acquire large companies as customers, which help add large numbers to the paid user base. Some of Slack’s largest customers include IBM, Oracle, Target, BBC, Workday and E-Trade, with approximately 70,000 businesses paying for the company’s services.

We have created an interactive model for Slack which breaks the company’s value down into a few key drivers and metrics. Based on this analysis, we estimate the company’s fair value at over $8 billion. In this note we explain these estimates in more detail.

Growth Prospects, Competitive Environment

While Slack remains poised to report strong revenue growth over the coming years, owing to the first mover’s advantage it has over competing services, the company could face challenges from tech giants entering this space over the last few years. Microsoft (NASDAQ:MSFT) Teams was announced in November 2016, and had a customer base of around 200,000 businesses by March this year. Facebook (NASDAQ:FB) Workplace was also launched around the same time, with an acquired customer base of 30,000 businesses thus far. More recently, Alphabet (NASDAQ:GOOG) also ventured into this space by introducing Hangouts Chat for all G-Suite users earlier this year. Slack also faces competition from Cisco (NASDAQ:CSCO), which announced that it converged Cisco Spark and Cisco Webex into Webex Teams along similar lines.

Slack has raised several rounds of funding in recent years. While the company’s valuation has increased consistently for each round of funding, it is important to note that valuation in some of the early rounds were at very high revenue multiples. Over time, Slack’s revenue growth has accelerated. The company reported an annualized revenue run rate of $25 million in 2015, which increased to $75 million by April 2016. Subsequently, it increased to $100 million by November 2016 and $200 million by September of last year. This increase in sales has somewhat normalized its implied revenue multiple. In the most recent round of funding, Slack raised $250 million from SoftBank at an estimated valuation of $5.1 billion, implying a revenue multiple of around 26. At the time, it also generated some interest from Amazon (NASDAQ:AMZN) for a potential acquisition for a rumored $8-10 billion.

Our valuation estimate for Slack stands at around $8.3 billion based on our 2018 forecasts and estimates for the company. We believe that if Slack does get a buyout offer, it may be advantageous for the company to take that decision before competing tech giants gain a strong foothold in the market. Slack’s operating expenses could scale up considerably in order to remain competitive with deep-pocketed companies such as Microsoft, Alphabet and Facebook. Moreover, these competitors have the added advantage of being able to bundle their workspace collaboration services with other core offerings, which could add customers at a more rapid pace relative to Slack. In that scenario, Slack would likely need to spend huge sums of money each quarter in order to attract and retain paying customers.

We arrive at our year-end valuation estimate for Slack on our interactive model for Slack using 5 primary core value drivers for the company:

  • Number of Daily Active Users (DAUs): This is the total number of users active on Slack, which includes both paying and non-paying users. Slack currently has around 8 million users, up from 6 million in September 2017 and around 4 million in November 2016.  We forecast this figure to reach nearly 11 million by the end of the year
  • Paying Users Among Total Users: We use this metric to estimate the total number of users paying for Slack’s services (this mostly includes enterprise or corporate customer subscribing to Slack for their teams). The proportion of paying users has fluctuated between 25-37% in recent years, but has seen a broad increasing trend, from 27% in late 2014 to 38% by May 2018. We expect it to remain in the 38% range this year.

  • Revenue Per Seat Per Month: This is the average revenue per paying user per month generated by Slack, which is obtained by dividing the reported revenues (on a run rate basis) by the user base at the time. This figure allows us to estimate the company’s total revenue run rate for future periods. The revenue run rate figure has fluctuated from over $10 per seat per month in early 2015 to under $7 in late 2016, before picking up to around $8.30 by mid-2017. We expect it reach around $9.50 through the current year given an increasing proportion of paying users and additional offerings.
  • Revenue (Annual Run Rate Basis): This is revenue reported by the company at intermittent periods through the last few years, which indicates the revenues generated by the company in a fixed period which – if scaled for the year – would represent annul revenues. This figure has increased from $25 million in 2015 to $100 million by November 2016. This further increased to an annualized run rate of $200 million by September last year.

As shown in the chart above, we expect Slack to generate revenues at a run rate of about $500 million by the end of the year. We apply a revenue multiple of 17 for Slack, based on the following:

  • Slack has built a sizable global user base in recent years, from 140,000 total users in August 2014 to 8 million by May 2018. According to Markets and Markets, the enterprise collaboration market (including file sharing & synchronization, unified messaging, enterprise video, enterprise social network) is expected to grow at a CAGR of 13% to become a $50 billion market by 2021.
  • However, Slack competes with some of the largest tech firms in the world, many of which offer collaboration as an add-on service to their core offerings, and have a significantly higher aggregate customer base for other services. If users choose to take bundled offerings from competing tech giants, it could slow down Slack’s user base growth in the long run.
  • Since Slack has been a pioneer in its domain, it has been valued at extremely high revenue multiples in previous rounds of funding. For instance, Slack raised $160 million in April 2015 at a valuation of $2.8 billion with a revenue run rate of $25 million, implying a revenue multiple of 112 (though of course the massive revenue growth ultimately justified that lofty multiple).
  • In subsequent rounds of funding, Slack’s implied revenue multiple dropped consistently, to 50.7 in April 2016, and 25.5 in September 2017.
  • Taking this into account, we believe that its revenue multiple will normalize further to under 20 this year. For the end of the year, we have a conservative estimate of a 17x revenue multiple for Slack, which is still considerably higher than more established internet companies.
  • As shown below, this works out to a figure of about $8.3 billion for Slack’s estimated value.

Disagree with our forecast? Feel free to come up with your own valuation for Slack by making changes on our dashboard.

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