When a fundamental story changes, investors need to reexamine their thesis. I'm finding a need to revisit my thoughts around Slack (WORK) now that Salesforce.com (CRM) may be getting into the corporate communication game. The company is writing Slack integration out and inserting its own messaging and collaboration app. Unfortunately, this offsets a lot of the optimism I had from the Amazon (AMZN) AWS strategic partnership.
It's not that Salesforce is a better partner than AWS, but Salesforce offered immediate benefits on the top and bottom line. The AWS impact has yet to be seen. Don't forget we still have Microsoft (MSFT) Teams in all of this, so now it appears as if Slack will be competing with both Microsoft and Salesforce. The issue here is now we have the top software player and the top CRM name standing toe-to-toe with Slack. Microsoft will use Office 365 to its advantage. Salesforce will likely use Customer360 as its main touch point, but really it is the entire platform that will offer an in for the company.
And while Slack is often talked about as a huge benefactor from the work-at-home need, we haven't quite seen those numbers in actual results. Last month, the company did report top and bottom line beats on revenue and EPS, but the 7% revenue beat didn't sniff something like we saw from Zoom (ZM) . Also, guidance for next quarter anticipated only a small bump in revenue while the full year guidance hinted at a second half shy of expectations. That leads us to pull forward concerns on revenue and earnings.
Of course, any expanded deal or benefits from Amazon will lessen concerns, and I can't eliminate the potential for Amazon in taking a stake in Slack. I'm sure they'd like nothing more than to beat Microsoft at its own game, and it would amp up the competition we already see in the data center/hosting space with AWS versus Azure. But I would think Salesforce.com is going to pinch margins. Even if the top line remains consistent, my concern is profitability gets bumped into the second half of FY2020. Both Saleforce and Microsoft are already extremely profitable. Both companies can squeeze hard on price and live with margin papercuts from a corporate communication and messaging produce/service in the name of winning business. They have other avenues to earn profits from those users that Slack lacks.
The current price action isn't helping either. WORK is set to close under the 50-day simple moving average (SMA) for the third straight day. Secondary indicators are bearish as well. I'm looking at $29 as the initial target, but we could possibly see a return to the mid-$20s.
When all is said and done, I'm not short here, but I am on the sidelines. There are a few too many questions for me. This was a name I had been very bullish on but the story has changed enough that I need to reconsider my stance.