Is Slack Overvalued?

by Trefis Team
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Slack (NYSE: WORK) went public in mid-June, with its current market cap standing at close to $19 billion. The valuation is sizable, considering that the company’s revenues stood at just about $400 million in the most recent fiscal year, with its operating losses also increasing. In this analysis, we take a look at some of the key valuation metrics for the company and compare them to similar communications platforms such as Zoom – a video communication player  – and Twilio – a cloud communications player that enables developers to add voice, video, and messaging to their applications. We also compare Slack’s user growth to Microsoft’s faster-growing Teams application, which comes bundled with Office 356.

View our interactive dashboard analysis Is Slack Too Expensive?

Slack’s Market Cap Is Roughly In Line With Peers

  • While Slack’s market cap is lower than Zoom, it is valued higher than Twilio.

Slack’s P/S Ratio Is Higher Than Twilio’s, But Lower Than Zoom’s

  • Slack’s Price to sales ratio based on projected 2020 revenue stands at 32x, this compares to a 44x valuation for Zoom and 16x for Twilio.

Slack’s P/S Is Higher Than Other Enterprise Software Players

  • Slack’s P/S is well ahead of the 7x levels of Microsoft and Salesforce

Slack’s Valuation Multiple Is Significantly Higher Than The NASDAQ And S&P 500

  • Slack’s P/S ratio is significantly higher than the NASDAQ and S&P 500, due to its higher revenue growth rates.

Slack’s Revenue Growth Is Higher Than Twilio’s, But Falls Short Of Zoom’s Growth Levels

  • Slack’s growth (82% in FY’19) has been outpaced by Zoom (118%) although its growth is well ahead of Twilio (44% in CY’19)
  • Zoom is expected to outgrow Slack going forward as well, likely explaining its higher valuation.
  • Twilio’s revenues over 2020 are likely to be driven by acquisitions.

Slack’s Gross Margins Are Higher Than Its Peers

  • Slack’s gross margins are higher than its peers, as the messaging content it handles is largely text/image based leading to lower hosting costs.

Slack Is Posting Deeper Losses Than Messaging Rivals

  • Slack has been posting sizable operating losses and its losses actually mounted in FY’19.
  • In comparison, Zoom reached operating break-even this year.

Slack Is Falling Behind Microsoft’s Teams – A Key Direct Competitor

  • Microsoft’s Teams application introduced just over 2 years ago is a direct competitor to Slack and comes included as a part of the Office 365 bundle for businesses.
  • Teams daily active user (DAU) base is larger than Slack’s, standing at 13M in June vs. Slack’s 10M (as of January) and growth rates have also been faster.

 

  • As Microsoft has over 180 million users on Office 365 (Business + Consumer) , it means that less than 10% of its user base is using the Teams collaboration tool, implying significant room for growth.
  • While Microsoft does not offer Teams as a standalone app, its availability on Office 365 could reduce the need for large businesses who are already using Office to subscribe to Slack.

Slack Still Has A Very Loyal Customer Base

  • Slack’s net dollar retention rate stood at 143%. While this is below Twilio, which had a 155% rate, it is ahead of Zoom, which posted a 140% retention rate.
  • Net dollar retention rate measures the % of revenue from current customers that a company retained from the prior year, after accounting for upgrades, downgrades, and churn.

Key Takeaways

  • While Slack’s valuation may appear high considering its high revenue multiple and its deep operating losses, the company is valued roughly in line with its peers in the communications/ software as a service (SaaS) space.
  • However, the rapid growth of Microsoft’s Teams application and potential threats from other internet behemoths with large user bases, such as Facebook and Google, could hurt the company’s growth rate going forward.

 

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