Slack Stock Rebounds After Earnings Sell-Off. But Is It a Buy?

Uncover - Slack Stock Rebounds After Earnings Sell-Off. But Is It a Buy

Author: Tim Phillips

September 11, 2020

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Slack Technologies Inc (NASDAQ: WORK), the communications and work tool, saw its shares plummet over 15% on Wednesday before investors started opportunistically buying into shares on Thursday. On a down day for the market, Slack shares actually ended up 2.6%.

Tim’s Take:                             

Slack was initially a communications tool that start-ups and small businesses alike used religiously. Being able to create “channels” and chats with fellow colleagues meant that the service was trying to recreate the workplace dynamic but in a remote setting.

It has since expanded its appeal and has gone head-to-head with Microsoft Corporation’s (NASDAQ: MSFT) Teams product in this new Covid-19 era of remote working.

Slack released earnings on Tuesday after the market close. The initial 15% plunge on Wednesday would have got investors thinking the company had missed expectations.

In fact, the company actually posted solid revenue of US$215.9 million in its fiscal second quarter, up 49% year-on-year. Paying customers also grew by 30% year-on-year to 130,000.

What investors didn’t like, though, was its billings numbers. A common metric for Software-as-a-Service (SaaS) stocks, billings indicates the sales to new customers as well as renewals/upsells to existing clients. It creates a comprehensive overview of how well the product is being monetised going forward.

Slowing growth

In Slack’s case, it’s been slowing and has been on a downward trend for a few quarters now. Billings for its latest quarter increased 25% year-on-year, far below its revenue growth of 49%.

For context, another stay-at-home favourite, remote agreements provider DocuSign Inc (NASDAQ: DOCU), saw revenue and billings growth of 45% and 61%, respectively, in its latest quarter.

Despite operating in a space that you’d think would be ideal to exploit the stay-at-home trend, Slack has actually been a disappointment this year in relative terms. Shares are up only around 10% year-to-date.

Personally, I’m not sold on its product offering and whether it’s a “must-have” for organisations. The slowdown in billings growth (which management has attributed to “distressed customers”) shows me that it’s being squeezed from two ends – both the macroeconomic uncertainty and the vicious competition in the space.

This is coming primarily from Microsoft Teams. Granted, Slack has filed a complaint with the European Commission about the anti-competitive practice of bundling Teams with the Microsoft Office suite.

But even if Teams isn’t a default add-on to Office, I don’t think there’s any guarantee that Slack can make up ground in this space. I’d see how it comes out of the other side of this pandemic before investing in this underwhelming stay-at-home play.

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About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.