Fortune reports that Slack Technologies expects a valuation of $16 billion to $17 billion when it goes public next week. That's more than twice the $7.1 billion valuation the chat/collaboration software firm received in a 2018 funding round.
And given what's known right now about investor enthusiasm for both Slack in particular and fast-growing cloud/SaaS software plays in general, a $20 billion-plus first-day valuation is looking pretty likely.
At "just" a $20 billion market cap, Slack, which will be going public through a direct listing, would be valued at 33 times the high end of a fiscal 2020 (ends in Jan. 2020) revenue guidance range of $590 million to $600 million, and 27 times the high end of a fiscal 2020 billings guidance range of $725 million to $745 million.
For all the good things that can be said about Slack's top-line growth, the quality of its collaboration tools and the strength of its app and services ecosystem -- and I've said a few such things myself -- such a valuation should give investors pause, particularly in light of Slack's cash burn and intensifying competition from Microsoft (MSFT) .
Excluding payments related to a tender offer and stock repurchases, Slack posted free cash flow (FCF) of negative $97.2 million in fiscal 2019, thanks in large part to a major jump in sales/marketing spend. And for fiscal 2020, the company is guiding (in spite of strong revenue growth) for FCF to be in a range of negative $105 million to negative $120 million.
The big sales investments Slack is making as it tries to win deals against Microsoft undoubtedly has something to do with its FCF guidance. Microsoft is three months removed from announcing that its rival Teams collaboration product, which is bundled with many business Office 365 subscriptions and (like Slack) is steadily seeing new features added, is being used by over 500,000 organizations. That's up from over 200,000 a year earlier.
Teams' momentum might also be part of the reason why Slack's billings growth, though still pretty strong, has begun slowing a bit. After growing 79% in fiscal 2019 and 96% during its January quarter, Slack's billings rose 47% annually during its April quarter. And though this outlook might prove conservative, Slack's fiscal 2020 billings guidance implies 40% to 44% growth.
In addition, in spite of its big sales investments, Slack disclosed in its latest IPO filing that its paid customer adds fell by 1,000 annually in the April quarter to 7,000. On the bright side, the number of paid customers producing over $100,000 in annual revenue grew by 70 sequentially, which is up from 53 a year ago. Slack, which provides both free and paid service tiers, still appears to be striking large enterprise deals at a healthy clip, but Microsoft might be impacting the pace at which its turns small and mid-sized businesses into paid clients.
Overall, Slack still looks poised to deliver healthy double-digit growth for a long time, and arguably, the strategic value of its platform -- many of its users often rely on it more than e-mail for communications -- together with the M&A interest Slack has reportedly seen in the past from tech giants warrant a valuation premium of some kind.
But every business still has its price. And the one that Slack appears set to receive following its IPO feels a little rich. Would-be investors might be better served waiting for the fervor to cool down.
This article has been corrected to note that Slack will be going public through a direct listing.