Good ole Gary Alexander with a great article on slack
He says slack has similar growth and margins to Okta, coup, mdb etc
50% y/y growth
Close to 90% margins
Only Saul eyesore I can see is that losses have increased y/y
From about 25% of revenue last year
To 30% this year
Slack forward revenue 19x
Love Okta and coup but is there something I’m missing?
Isn’t slack a great buy here?
Good ole Gary Alexander with a great article on slack
MusiCali, the good old Gary for me is slowly (or not slowly) becoming a “contrarian indicator”. He is blasting valuation of our stocks for how long now… perhaps 2-3 years at least. And where are these stocks compared with 3 years ago prices…
On the Work - I’m still keeping the long position. My smallest position, just 3.5%. Now, why it did not move up like our other stocks? I think the reasons are
- Weaker than expected (if any) by market Covid boost
- Big MS Teams competition
- Slowing revenue growth
Why I keep the position? I like a lot the GM and the thesis is that they will stabilize growth at 50% or so. I wanna see next quarter results to compare with the thesis. This is, however, my least conviction stock and company at this moment.
Perhaps others can add more thoughts on WORK here.
Thanks for the info V
That makes a lot of sense.
Just to be clear
I do not follow any of Gary’s bearish calls on our stocks.
However I have noticed that some of his bullish articles have had good results
Band, spot, roku
So when I saw one pertaining
To a company in our saas sector
With 50% growth and 90% margins
I thought it appropriate to bring it to the board
WORK/Slack is on my watch list so I’m interested in this thread and will add my 2 cents.
aside: my daughter works for Arizona State University in their outbound marketing/Social Media group and the entire ASU work force uses Slack as their communication channel. I asked her if she liked using it and she does, which tells me it’s easy to use. She just started using it a few months ago and picked it up almost immediately.
Regarding Gary Alexander, one of the insights I strive for is to assess the value of the information from a particular source. For example, I always look at Saul’s posts. Why? Because his historical returns are nothing short of phenomenal: he’s doing something right. I value Bert Hochfeld, from SeekingAlpha.com, because his insights have proven accurate, though he does make mistakes, as some have pointed out on this board (concerning classifying FSLY as a CDN). I’m sure Gary Alexander is intelligent, and he points out aspects of a company or valuations that might be “true”, but the market does not always react in a way that supports his assertions. So while I read his articles, I don’t always strongly weight the information contained in them…
Regarding WORK, it is interesting that they have not seen a similar performance of some of the other companies we follow on the board. I typically will do a quick checklist to see if a company merits further research and to perhaps understand why a company share price is not doing as well as it should
- Revenue growth: 50% YoY; (check)
- High recurring revenue and high $NER: Yes to both; Paid Customers with greater than $100,000 in annual recurring revenue represented 49% of revenue in the first quarter, up from 43% in the year ago quarter. $NER = 131%
- High (non-GAAP, e.g. adj) Gross Profit: ~89% (check!)
- Improving metrics: yes, they have some improving metrics, sequentially and YoY. I list a few below
a. FCF from OPS increased from last quarter (I like FCF from OPS because it’s a pure metric, basically, a measure of how much money a company is making from their true business.
b. Revenue growth acceleration: no, this is negative, going from 50% to ~43%. (They are forecasting 42% to 44%, but we know that companies often are conservative in their forecasts. Note they substantially beating Wall Street’s expectations of $188.1 million (+40% y/y) by a wide 10% margin (though Street analysts should be familiar by now with the fact that Slack routinely under-guides and sets a low bar for itself to cross, as do most of the companies we follow…)
c. non-GAAP operating margin improved 17 percentage points year-over-year, check.
d. Expenses did grow…why? R&D expenses were $61 million or 30% of revenue. They invested into Slack’s user experience, scalability, etc. They expect R&D expenses to grow roughly in-line with revenue growth in fiscal 21. Sales and marketing expenses were $95 million or 47% of revenue. They increased marketing spend in the quarter due to the work from home surge and plan to invest into what they see as a major secular trend in the shift to remote work. As such, they expect sales and marketing as a percentage of revenue for fiscal 21 to be similar to Q1 levels. G&A expenses were $40M or 20% of revenue. They continue to expect G&A expenses as a percentage of revenue to decline moving forward.
e. Billings growth rate… declined. This might be why SLACK is not enjoying some of the appreciation others in this category are experiencing. Slack billed $206.0 million in the quarter, up 38% y/y. Though Slack’s nominal value of billings still exceeded revenue (indicating that Slack is still building deferred revenue), the billings growth rate of 38% y/y decelerated 9% sequentially - usually a leading indicator of near-term revenue deceleration (which is noted above). Mr. Alexander suggests that because they have such rich gross margins (89% adj.), this effect might be minimized because so much of their revenue (which is growing in an absolute sense) is flowing to the bottom line. But we know how much we favor revenue growth and revenue growth acceleration…
- Is it “sticky”?; does it have a moat?, etc. Seems sticky to me. Many users signed on to Slack for the first time during the pandemic (including my daughter), but these likely aren’t one-time installs. Slack becomes an important tool in a team’s infrastructure, because important information and documents is often indexed in messages, making it somewhat difficult to remove once installed lest you lose that data.
All in all, I’m guessing they aren’t getting the premium valuation because their revenue growth isn’t accelerating as much as some of the other SaaS darlings, but that’s just a guess.
I believe die to slack reporting flat guidance right after Zm reported the best Q ever is one reason and the other is the 40% run up just prior for the 25% drop after earnings.
From the call:
“We are fortunate that Slack enables remote work. Due, in part, to this, growth in the first quarter accelerated and was above our expectations. We’ve also continued to see stronger-than-normal, top-of-funnel activity in April and May. However, there are potential headwinds to our business.
We estimate that about a quarter of our business is derived from companies with less than 100 employees. Within this SMB base, we saw churn trend a bit higher than historical norms in March and April, albeit off a low base. When I look at the breakdown by industry, our customer distribution is highly diversified. However, some of our customers have been impacted by COVID-19.
We estimate that less than 20% of our business is derived from the most directly impacted industries, such as travel, hospitality, commercial real estate, ridesharing and retail. In the enterprise segment, some sales cycles have accelerated due to work from home, but others have slowed, particularly in impacted industries. Our pipeline remains very healthy. But on balance, there’s less visibility into how IT spending will trend for the remainder of the year, particularly if the economic effects of the COVID-19 pandemic persist or worsen.
As mentioned previously, we also plan to accommodate certain distressed customers during the crisis via the use of flexible contract structures and billing terms. While this is less of a revenue impact, it directly impacts calculated billings and free cash flow. When we guided for the full year in early March, we accounted for some of these headwinds. Thus far, in the first half, the tailwinds have outweighed the headwinds.
However, we believe that macroeconomic uncertainty is significantly greater today than it was then. Taking into account the puts and takes of the above, we continue to drive visibility to guide to quarterly and full-year revenue but are withdrawing our calculated billings guidance.”
I think they’re sand bagging.
I love the 97% increase in RPO and I believe the new Channels product is not yet in the price. I bought a 5% position when it fell after earnings.
5. Is it “sticky”?; does it have a moat?
No, Slack does not. There is a preference factor vs a corporate relationship factor in Slack vs. Microsoft Teams. They both perform the same functions in somewhat different ways. Some people detest Teams and prefer Slack, and some people are fine with Teams (in my recent experience, Slack can get “love” and Teams can get “yeah, ok”).
Companies that are going with MS as a platform provider (Azure, O365, SPO) are getting Teams as part of the enterprise package (replacing Skype formerly Lync). Non-MS companies are going Slack. But, they both perform the same collaboration functions; it’s that Slack does it in a more lightweight and less tightly coupled way, and Teams… is tied to O365 and SharePoint. (cough).
Yesterday (7/12/2020), RBC Captital Analyst Alex Zukin reiterated his buy rating of WORK and price target of $38. Link to the article below
In summary, he issued the buy rating after Slack announced the acquisition of Rimeto, a modern business directory. He believes the Rimeto acuisition adds stickiness to WORK’s offerings by integrating data from various sources to deliver… “rich employee profiles including skills, experience, projects, birthdays and location”, in addition to the standard company directories (name, phone info, locations, email).
Might be why WORK is up 3% today as of 12p ET.
On today’s email update from Cathie Wood at ARK capital her analyst laid out a case for Slack. It sounds like they envision Slack as a social network for enterprise business.
Here is a deeper dive on Teams vs Slack from Ben Thompson at Stratchery
Initiated a small position today
I am long Slack. I think the business is severely undervalued.
It’s extremely impressive how fast they are growing revenue at scale and they’ve been working on shared channels for years. The Rimeto acquisition is a logical next step and they’re going to start connecting businesses to each other for business to business communication/directory.