Slack, the workplace communications service, is proving – just days after its shares went public – to be a company of paradoxes.
Its initial public offering was not an actual IPO, and its shares are currently down, even though they are still up. Confused? Well, let’s take stock of Slack.
The company, based in San Francisco, offered its shares on 20 June direct to the public, by-passing the traditional IPO route. This cuts out the investment banks who would normally be hired to line up big institutional buyers and to underwrite the issue, agreeing to pick up any unsold Slack shares.
Slack: It’s an acronym
These services do not come cheap, and Slack will have saved a tidy sum as a result. But investment bank support does have a value, and the downside for Slack may be that the Slack stock ticker behaves more erratically than would otherwise have been the case.
Despite the fact that Slack’s share offering was not an IPO in the traditional sense, it makes sense for us to refer to it as such.
As for potential share price volatility, has this happened yet? You judge. The guide price when trading started on the New York Stock Exchange was $26 a share, and Slack company stock immediately went to a premium, at $38.62.
It peaked on 20 June at $41.64, after which the excitement died down somewhat. On 24 June, Slack Technologies stock reached a post-IPO low of $35.50. Since then, it has rallied a little to $35.76.
Thus, Slack post-IPO is down on the high point seen on 20 June but up on the guide price.
So much for the Slack IPO results. What, exactly, is Slack?
To start with, Slack is an acronym for “Searchable Log of All Conversation and Knowledge” – one of those cases in which one suspects that the words were selected to fit the acronym, rather than the other way around.
Stock too expensive?
As has become common knowledge since the company prepared its stock market debut, what is now Slack’s mainstay – the “collaboration hub” allowing colleagues to have fast and effective communication with each other – started life as a component of an on-line game, Glitch, that did not find favour in the market.
In its own words, this is what Slack does: “Slack is a collaboration hub where the right people and the right information come together, helping everyone get work done.
In Slack, conversations happen in channels – organised by topic, project, team or whatever makes sense for your company. With channels, the right people don’t get left out and information doesn’t get lost.”
This has obvious appeal in a world in which the proliferation of communications platforms – e-mail, Twitter, voicemail and the rest – poses a constant threat of crossed wires and misdirected data. Giant companies on Slack’s client list, from computer group International Business Machines to film and television corporation 21st Century Fox, clearly agree.
So, what can go wrong?
The first potential pitfall was highlighted in Slack IPO analysis by investment adviser Stone Fox Capital, which is, briefly, that the shares may be overpriced.
It said: “The stock valuation is far out of line with the prospects for the business and in comparison to comparable public companies. Despite not taking the traditional listing route, Slack has a rich market valuation that provides limited returns for investors.”
Slack’s remarkable five-year rise
Furthermore: “Slack has only ten million daily average users (DAUs) so naturally the market is extrapolating the potential to reach 100 million DAUs and beyond in the future.”
This may seem odd, he said, “for a company that might appear not to have significant costs (it’s an app and web-based service provider after all)”.
Which takes us to a third potential downside, which is that Slack is losing money. That’s hardly unique in the world of hot technology-based businesses, but it is worth noting that Slack enjoyed revenue of $400 million in the year to 31 January 2019 on which it made a net loss of $138.9 million.
In its listing documentation, Slack warns under “risk factors” that “we have a history of net losses”. Another risk factor makes up the fourth point of concern, which is that: “The market and software categories in which we participate are competitive, new, and rapidly changing, and if we do not compete effectively with established companies as well as new market entrants our business, results of operations, and financial condition could be harmed.”
Quite so. How high are the barriers to entry in the workplace communications market?
All that said, the Slack IPO market reaction, with the stock still well above the guide price, suggests the optimists are winning. As the respected Computerworld magazine put it on 21 June: “Slack’s public listing… marks the latest chapter in the company’s remarkable rise since its launch five years ago.”
It added: “The company is poised to capitalise on the booming interest in team collaboration and channel-based communications. There are a number of tactics it can take as it looks to push further…[and] fend off rivals while also evolving its own software to meet the changing needs of an increasingly digital workforce.”
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