Slack Technologies Inc. (WORK) has not been one of the better new names for investors in 2019, but that could change if the first earnings report since its initial public offering (IPO) proves to be positive.
Slack was a unique name to come public, pursuing a direct listing ala Spotify (SPOT) rather than the traditional IPO strategy taken by companies such as Lyft Inc. (LYFT) , Uber Technologies Inc. (UBER) , and Chewy Inc. (CHWY) . That in part has led to a poor performance relative to its software peers, with Slack falling swiftly from its first day of trading when shares popped to more than $40 back down to near its initial reference price of $26 per share.
The market may perceive that the plunge of more than 25% since June has led to a more favorable opportunity, as Slack shares were up about 2% in early Thursday trading ahead of earnings.
"Slack is well-positioned to report strong 2Q20 results driven by a differentiated messaging-centric software platform that helps automate middle-office functions while improving worker alignment and productivity," Keybanc Capital Markets analyst Brent Bracelin said. "We remain buyers of WORK as a category pioneer with multi-billion-dollar revenue potential, particularly given shares have declined 26% from the opening direct listing price of $38.50 vs. Nasdaq -1%."
Bracelin set an "Outperform" rating for Slack, which is in line with sell-side consensus, and a price target of $44 per share, well above the already bullish consensus at $38.92.
For its second-quarter report on Wednesday, Slack is expected to report a loss of $0.19 a share on revenue of $141.3 million, both of which would suggest significant improvement from the first-quarter figures reported in the S-1 filing earlier this year.
In addition, new orders are expected to reach $213.5 million as Slack chases ever-important growth and fends off competition from larger competitors such as Microsoft Corp. (MSFT) .
"Strong results could help calm investor jitters on competition," Keybanc's Bracelin advised clients on the competition angle. "We see an equal opportunity for both Slack and Microsoft Teams to grow as alternatives to traditional e-mail and argue a duopoly-like market structure could form around the two most popular messaging-centric platforms at maturity."
Bracelin noted that despite Slack's competition from a trillion-dollar company, his channel checks show customers such as Splunk Inc. (SPLK) , Workday Inc. (WDAY) , CBS Corp. (CBS) , and American Express Co. (AXP) are flocking to the platform, which should sustain a pick-up in large-scale revenue.
Keybanc expects 31% growth in Slack's customer base from its nearly 10-million strong user base.
Overall, Bracelin sees messaging becoming a replacement for email as larger companies seek faster communications solutions, cementing Slack's position as a leader in workplace software. He is not alone.
"In the bull case, Slack creates network effects amongst users that prove a durable competitive advantage and sustains its positioning even within Microsoft accounts," Morgan Stanley analyst Keith Weiss said, seconding Bracelin's points. "In the near-term, Slack can tilt the debate in their favor with a strong bounce back in growth from Q1."
Still, for more skeptical investors, money-losing companies present the problems of burning through cash and struggling on the path to profitability.
Slack has acknowledged the challenge.
"We have a history of net losses, we anticipate increasing operating expenses in the future, and we may not be able to achieve and, if achieved, maintain profitability," the company's S-1 filing said in a familiar refrain for IPO investors in 2019. "We expect to continue to incur net losses for the foreseeable future and we may not achieve or maintain profitability in the future."
Indeed, FactSet estimates do not foresee Slack achieving profitability, even on a non-GAAP basis, within the next two years.
The consensus full-year bottom-line estimate for fiscal 2020 is a loss of $0.42 per share with the expectation of improvement to a loss of $0.08 per share in 2022.
"[Slack's] ongoing cash burn and lack of a clear pathway to profitability are key concerns, particularly if revenue growth continues to decelerate as it did in the fiscal 2020 first quarter," MKM Partners Rohit Kulkarni cautioned shortly before the earnings release.
With selling and marketing expenses expected to grow as Slack courts new customers, those costs could provoke further fears if profitability numbers continue to lag.
Still, Kulkarni maintained his "Buy" rating on Slack in light of its long-term opportunity and currently discounted valuation to cloud communication peers such as Zoom Video Communications (ZM) and Twilio Inc. (TWLO) and a listing strategy that avoided headline risks related to lock-up periods.
The risk-reward dynamics of the growth-focused company at a lowered valuation remains to be seen, but with a long runway to profitability the earnings results on Wednesday could be a key indicator for investors not yet trading Slack.The report will be available at 4:05 p.m., to be followed by a conference call available for webcast here.