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John Engle
John Engle
Articles (332) 

Slack IPO: Surfing the Cloud Software Wave

Other cloud stocks have been riding high, and Slack should catch the tailwind

June 11, 2019 | About:

Slack Inc. (NYSE:WORK) will be making its public market debut on June 20. Slack’s core business is its cloud-based messaging and team management platform. User growth has been very healthy, as has revenue growth. Its user-friendly interface has won it many big converts, especially in tech-savvy Silicon Valley.

While some high-flying tech unicorns have faltered out of the gate, Slack looks poised to receive a warm response from the market.

Cloud companies soaring

Now seems to be a propitious time for Slack to go public, in light of the market’s current love for anything cloud related. Since the December slump, cloud stocks have taken off into the stratosphere, dwarfing the performance of the S&P 500 index, despite the broad rally in the stock market since the start of the year.

Slack should be able to tap into that broad enthusiasm as it takes its own first tentative steps into the public market.

It’s good to go public

Many of the cloud-related business that have gone public over the last few years have enjoyed an extended period of public goodwill. Okta Inc. (NASDAQ:OKTA) offers a clear example. The identity and access management company went public in April 2017 and has seen its share price rise more than 440% to date. Likewise, cloud communications platform Twilio Inc. (NYSE:TWLO), has climbed 447% since its own IPO in June 2016. Zoom Video Communications Inc. (NASDAQ:ZM), the latest cloud stock to test the public waters, has jumped more than 50% since its April debut.

Clearly, cloud-based companies of every stripe are enjoying the same broad enthusiasm. That bodes well for Slack.

Private trading shows strength

Another data point in Slack’s favor is the performance of its Class-B shares, which trade privately. Over the four months ending in May, these shares traded for between $21 and $31.50. Taking the weighted average of these trades, we get an approximate share price of $26.38. That translates to a 142% increase over its last private valuation of $7 billion last year.

From this trading performance, even in a deeply illiquid market, we can surmise that the market will show healthy demand for Slack’s stock.

Direct listing danger

Not all is sunshine and rainbows for the Slack IPO, however. Indeed, it will not be a true IPO at all, but rather a direct listing of shares. While quite rare, such offerings are not unheard of. However, they are known to result in increased volatility due to the fact that there is no underwriter to support the price or facilitate large-scale purchases. Spotify Technology SA (NYSE:SPOT) went public in a direct listing in April 2018 and, after falling nearly 30% to its December low, remains slightly underwater from its debut.

Slack investors should look to the travails of Spotify as a cautionary tale. But Slack has the advantage of going public to a comparatively more receptive market, which ought to help cut down on some of the volatility.

Verdict

While cloud software stocks are enjoying a time in the sun at present, it is important to recognize that market enthusiasm can evaporate in short order. This is especially true in the case of stocks with highly optimistic multiples, as most cloud stocks have. Indeed, these stocks are actually trading at price-sales multiples in excess of those seen during the dot-com bubble. Yet, while euphoria can quickly turn to despair in hyped-up stocks and industries, Slack should be safe for the next couple months at least.

Overall, Slack looks like a fairly solid short-term play, though we would caution against trying to buy this one for the long-run just yet. It is certainly not a value stock by any reasonable definition.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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