Zoom Video Communications (ZM) is carrying market optimism after blowing away earnings expectations on Thursday evening, proving a more positive backdrop for a Slack Technologies direct listing this month.
Shares of Zoom ripped upward over 20% after Friday's open, squeezing significant short interest and encouraging a more bullish view among even more cautious Wall Street analysts.
"ZM reported exceptionally strong results for its first quarter as a public company with metrics that surpassed sell-side and buy-side expectations," Credit Suisse analyst Brad Zelnick said. "The quarter epitomizes our view that Zoom's product and technology differentiation creates a sustainable advantage within the Unified Communications market and we expect the viral nature of Zoom's product to drive continued growth momentum."
The secular move towards cloud communication and viral product nature are aspects of the business that extend beyond Zoom itself, providing solid footing for a key partner anticipating the listing of 118 million shares on June 20.
Zoom has been available within Slack since 2016, but the ties between the two company have only been reinforced as of late as both strive to steal market share from Microsoft's (MSFT) communication product line that includes Skype and Office 365.
"It's our shared belief that teams are better equipped to be nimble and responsive to change when they have a clear line of sight to their organization's strategy and goals, but the only way that can happen is when teams have access to simplified communication," Slack said in a statement in late April. "So we're partnering up to build on the success of the current Zoom integration for Slack, which more than 10,000 Slack teams already use on a monthly basis (up over 200% from just a year ago)."
The statement noted that integration will continue to be a theme for both companies this year as Slack improves its calendar operations and Zoom doubles down on its Zoom Phone effort.
"Zoom Phone became generally available earlier this year and the company is having early success," JMP Securities analyst Patrick Walravens said, noting an agreement with telecoms equipment supplier Ciena (CIEN) for 5,000 licenses.
The integration of Slack onto this platform could be a major catalyst and open it to a larger addressable market off of the workplace desktop environment it currently dominates. With 10 million plus daily active users according to its S-1 filing, significant growth drafting of Zoom would give Wall Street exactly what it likes to see from newly listed growth stocks.
To be sure, Slack is differentiated from its partner Zoom by a crucial metric, that being profitability.
Zoom was a unique IPO name in 2019, as its regulatory filings came without lengthy statements on net losses and an uncertainty on potential profitability. Zoom had already achieved a profit and doubled down on its ability to succeed in public markets with its first earnings release on Thursday night.
By contrast, Slack remained much more cautious amidst its growth narrative.
"We have incurred significant net losses in each year since our inception, including net losses of $146.9 million, $140.1 million, and $138.9 million in fiscal years 2017, 2018, and 2019, respectively," the S-1 filing states. "We expect to continue to incur net losses for the foreseeable future and we may not achieve or maintain profitability in the future."
A familiar refrain among some of the companies that have not enjoyed as positive a post-IPO reception as Zoom, Uber (UBER) and (LYFT) being key examples.
Still, the revenue growth for the company is encouraging in the SEC documents.
"We have experienced rapid growth in recent periods. Our revenue was $105.2 million, $220.5 million, and $400.6 million for the years ended January 31, 2017, 2018, and 2019, respectively, representing annual growth of 110% and 82%, respectively," the filing adds.
If this dynamic can continue, aided by Zoom's rapid surge in usage, Slack could end up being profitable in the long run and thus a much more interesting direct listing than many initially anticipated.
The company is the first high profile private company to choose a direct listing as opposed to an IPO in 2019, and likely the most anticipated company to pursue this strategy since Spotify (SPOT) in 2017.
(Microsoft is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells MSFT? Learn more now.)
