May 1, 2019

Breakingviews: Slack needs a channel for valuation skeptics

by Breakingviews.

Slack Technologies may need a channel for valuation skeptics. The email-disrupting software firm’s revenue jumped by a hefty 82 percent in its fiscal year ending in January to just over $400 million. But losses held steady at roughly $140 million, leaving profit far away. Private share sales in March may mean Slack is expecting a far higher valuation from its upcoming direct listing.

Slack’s number of paying customers grew by about 50 percent to 88,000 in the year to January, and it has 10 million global daily active users, according to the draft prospectus filed on Friday. But operating expenses rose fast enough to swallow up all the revenue and more.

A valuation of $7.1 billion, the last price tag publicly disclosed by the company in August 2018, already seems more than ample when half a dozen of Slack’s tech peers, including the likes of Workday and Atlassian, now trade at an average multiple of 17 times the last 12 months’ sales. Slack disclosed on Friday that its stock traded privately in March at a price range around $23.50, against $10.71 last August. Apply that gain to last year’s published valuation for the company and it would now be worth nearer $15 billion, approaching a whopping 40 times sales.

Slack’s share sale will also lack the guardrails of a traditional initial public offering. Direct listings are cheaper because no new capital is raised and bankers can’t charge high underwriting fees. But that also means trading could be more volatile because there is no price discovery beforehand and no banks acting to stabilize the stock once it starts trading.

Governance is also a concern for investors considering buying Slack stock. Insiders and early backers control disproportionate voting power, with Class B stockholders receiving 10 votes per share. The company also has a staggered board, with only one-third of directors up for election each year. Slack co-founder Stewart Butterfield is both chief executive and chairman.

Slack does have an enthusiastic following and is easier to use than rivals like Microsoft Teams. And music-streaming service Spotify Technology managed a smooth direct listing last year. But Slack doesn’t have a similar household brand. Investors may want to chat through the risks before buying.


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