Complex Made Simple

The Slack Technologies IPO has 30% downside risk!

Wall Street suggests a $15 to $17 billion valuation range for Slack Tech IPO, but there are problems that would make it lose 1/3 of its value

Direct listings can trade in a wide, erratic range in the aftermarket Expect a tsunami of insider/employee selling when the shares trade on NYSE on June 28th Slack competes in a cutthroat global market with Microsoft, Oracle and SAP, who can replicate its offerings and product range
By Matein Khalid: Chief Investment Officer and Partner at Asas Capital

Slack is one of Silicon Valley’s hottest cloud software platforms, a global messaging and delivery hub for collaborative data teams. Slack boasts 10 million daily active users in 160 countries and transmits 4 billion messages a month, even if its software has not made E-mail obsolete. Slack has 95,000 paid users and its NYSE symbol WORK is quite apt. However, one data point in the S-1 prospectus filed with the SEC alarmed me. Operating losses will surge $141 million in fiscal 2018 to a projected $182 – 192 million in 2019.

With $800 million in cash on its balance sheet, Slack does not need to raise new capital or issues new shares. So it has opted for a direct listing on the NYSE and not a conventional IPO. The Wall Street grapevine suggests a $15 to $17 billion valuation range for the Slack IPO – or to be capital markets nerdy, Direct Public Offering or DPO. I have a problem with the Slack deal for several reasons.

More by Matein: World financial markets are at an inflection point in mid-June 2019

One, as Spotify demonstrated, direct listings can trade in a wide, erratic range in the aftermarket. Two, the last private funding round valued Slack at $7 billion in August 2017, so I expect a tsunami of insider/employee selling when the shares trade on NYSE on June 28th. It is never prudent to pay an exorbitant “greed premium” to insiders in the current unicorn bubble, as Uber and Lyft public shareholders learn the hard way.

Three, Slack’s user growth rate has decelerated in the past year, never an auspicious omen for a nosebleed valuation IPO or DPO.

Four, while cloud software IPO’s Zoom, Twilio, Okta et al had fabulous post-IPO performances, the US-Chinese economic Cold War, recession risk and the antitrust threat against Google has caused the risk premium on NASDAQ to rise, a second derivative storm cloud (forgive the awful pun) on the Slack IPO. The time to be scared merde – less is when things from la-la land wonderful to just plain wonderful. That time is now for the Slack IPO. I remember the trauma of the Zuora IPO, which lost a third of its value in a single session after it reported earnings that missed Wall Street’s inflated expectations. Never forget that when a direct listing IPO gets slammed, there are no six-month lock ups to cushion the fall.

More by Matein: My projected trading range for Citigroup shares in 2019

While slack is unquestionably one of the fastest growing software as a service (SaaS) startups in the history of Silicon Valley, it competes in a cutthroat global market with Microsoft, Oracle and SAP, who can replicate Slacks offerings and product range. Microsoft Teams has 500,000 corporate clients and is embedded in the Office 365 software suite. There are other startups such as Asana and Althassian who can well challenge Slack’s franchise at a time when the cost of user acquisition is rising and sales/marketing costs are an alarming 60% of global revenues. Slack’s revenue growth has been stellar in the past two years, up from $105 million in 2017 to an estimated $400 million in 2019. Yet the slowdown in paid users suggests hits parabolic 100% revenue growth is not sustainable – and I am just not prepared to buy the shares at 40 times revenue when I know any insider (100% smart money by definition) with half a brain will scramble to exit in the public market without the constraint of a six month lock up period.

More by Matein: Airbnb is a winner unicorn IPO, unlike the sad sack Uber IPO

So I can easily predict that the Slack IPO will lose one third of its value to settle at a market cap of $10 – 11 billion. This will, of course, devastate the accounts of some of my family office peers in the GCC/DIFC who bought Slack from itinerant, unlicensed deal brokers at $14 – $15 billion valuations.

Slack can also see operating losses rise as its megacap collaborative/cloud software competitors force it to raise spending on research, development, software engineering talent and innovation. I am horrified to see net losses in the most recent quarter rise to $38 million, up 50% from a year ago.

I am certain dumb money (retail) will go gaga for the Slack IPO as the firm has built a loyal, mass market brand and the underwriters have peddled the deal shamelessly in global roadshows. Yet if Slack trades at a market cap of $20 billion, I believe it could prove an exquisitely profitable short. I plan to short Slack at $36 – 38 for a $22 – 24 target. As usual, no guts, no glory. As usual, there are none so blind as those who refuse to see – or read an S-1 before they pressure private clients to buy an IPO for a fat commission. What a pity, what a world, what a regulator!