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Slack: Strong Short Opportunity On Earnings

Mar. 09, 2020 9:01 AM ETSlack Technologies, Inc. (WORK)18 Comments
Damon Verial profile picture
Damon Verial


  • Slack is unprofitable, will still be unprofitable in the near future, and only bolstered by hype.
  • The underlying business model lacks barrier of entry and differentiation.
  • Earnings will be a reality check for those holding the stock, and I recommend playing it in the short direction.
  • Looking for a helping hand in the market? Members of Exposing Earnings get exclusive ideas and guidance to navigate any climate. Get started today »

We usually do not run earnings trades on stocks with little data, so I write this with the warning that this trade is more speculative than most of my earnings plays. I am shorting Slack (NYSE:WORK) into earnings. The data I do have support the trade, and my thesis on the company itself is bearish.

WORK is reporting its fourth quarter earnings on March 12. Whether it rises or falls, one reliable aspect is that, as per my backtests against expected movements (as measured by the average movement of a stock in the market), WORK underreacts to news. That is, earnings will be more slowly priced in than usual (read: compared with other stocks), implying that we can ride post-earnings drift.

Still, on the short side, I would suggest taking profits sooner than later. WORK’s investors are strongly bullish on this stock and constantly looking for dip-buying opportunities. You can see in its chart that the company has remained relatively unscathed during the recent correction.

Work has risen against the SPDR S&P 500 ETF (SPY). (Source: Stockcharts)

Building a Markov chain on WORK’s price action is illuminating. A Markov chain with states {up, down, white, black} - the former two indicating WORK opening higher or lower, respectively, and the latter two indicating WORK ending higher or lower, respectively – is shown below, with transition probabilities displayed connecting the states. You can see that in the past month, the dumb money (read: those trading at the open) has always bought the dip:

(Source: Damon Verial; data from Tiingo)

The smart money is not buying the dip. This does not mean they are not bullish, though, as you can see that 80% of the time the smart money is buying with momentum. Still, the smart money is engaging in slightly more selling than buying, yet the stock remains bolstered

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This article was written by

Damon Verial profile picture
Damon Verial is a statistical analyst who uses his skills to research stocks, options, and investment strategies. In addition, Damon is the writer of Copy My Trades, a trade-alert, subscription-based newsletter, available at his personal website. He is also the writer of Exposing Earnings, an in-depth earnings prediction service here on Seeking Alpha. . Damon makes his living as a gap trader, an earnings trader, and an interday trader. In his free time, he writes for Seeking Alpha, where he focuses on seasonal investing, market timing, and earnings analyses. . Damon has written several successful stock analysis algorithms, including algorithms that can predict gap closure, intraday patterns, and news overreactions. They will soon be publically available for subscribers. .Damon’s undergraduate education was in statistics and mathematics at the University of Washington; his graduate education was in psychology at National Taiwan University. He currently lives in Fukuoka, Japan.

Analyst’s Disclosure: I am/we are short WORK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (18)

the big risk to Slack is offices going cheap/free for internal messaging services. Without a doubt Slack is peoples preferred inter office chatting platform and is much better than its competitors. Teams being free within office 365 is the biggest risk. However I think we will see companies invest more in chat services with the shift to more remote working (especially with the Coronavirus).
For what it's worth, I've worked at 3 places that is on O365 and has Teams as part of their subscription. All three decided to use Slack instead
David Jackson profile picture
@Damon Verial -- fantastic call on $WORK's earnings.

What do you prefer about Discord to Slack?
Damon Verial profile picture
Thanks. To answer your question:

For one, Discord is just more fun than Slack, which feels like a corporate product made by business executives. Discord feels like it was made by hackers. Second, the voice chat quality is much better than Slack's, obviously making it more useful for certain tasks and server types. I'm in a scam-baiting discord, and it's set up to where anyone can run a live scam bait call, while others listen in. As a lot of these calls are being run through VOIP and phone number spoofing programs, connecting (usually) India to the US, I'm quite impressed that the voice quality is so high. Finally, the revenue model will allow Discord to not only remain free (and ad-free) but also secure (as in users won't have to worry about their data being sold or privacy being breached).

@David Jackson
1GMD profile picture
Nice call
Medici profile picture
WORK is going to fly on the work from home spin tied to their earnings call. Shorting it is a bad idea.
SG-account profile picture
In the longer term, I don't see Slack managing to convert enough unpaid users, whether enterprise or SME, to justify its current market capitalization valued on a DCF basis. There is nothing outstanding about the technology that makes it a "must-have"; as the author noted, Discord and many other free alternatives are available and widely used.

At this valuation, cloud companies need to have a truly "killer" product to justify sharply negative earnings/lack of earnings leverage, and the revenue deceleration/decline in paid customer adds & billings per customer shows that the vast majority of users see no reason to convert to paid accounts. If those conversions don't happen, the company will continue to fail to show a path to profitability, as users will simply choose to use multiple collaboration services on an unpaid basis. The decline in net retention rate highlights the fact that paid customers don't see the product as useful enough to implement it across their organizations, while startups will continue to use Discord and alternatives in lieu of paying for Slack's paid features.

However, the company should be able to perform well with regard to revenue and guidance beats in the short term, as large enterprises, especially those already using Slack, see it as a simple, if not perfect, tool for remote collaboration. Eventually, a superior alternative should emerge, but Slack has enough short-term stickiness and moat to do well for the next year or so.

I don't think the fundamental technology is good enough for Slack to ever become a "must-have" and for the company to be able to substantially cut operating expenses while continuing to grow above 30% CAGR on a five-year forward basis (in contrast to companies like TEAM and AYX which have shown the ability to generate profits along with strong revenue growth, while DDOG looks like a a company that is able to generate revenue growth along with meaningful operating leverage). There are better short opportunities out there in SAAS/security without the significant short interest (PLAN, ZS in particular).
forget the prospects of the company.... like it or not it beat earnings estimates in the last 2 Qs. So if you want to advise on option earnings play, we need to look at techincals, not fundamentals. It may not have positive revenue, but may still beat estimates, and with that the stock price will (should...) rise. With the work-from-home dynamic happening now, and its history to beat earnings estimates, I would guess movement opposite from your assumption, i.e. it will beat earnings and make a small to medium jump in price.
haikman profile picture
I LOVE stupidity. It's how we traders and investors make big money.
Gary and Ed Wedbush at Wedbush Securities started WORK
with a $14 price target and that morning was the trading low all time for the stock.
Now, you have this short who says to ignore the paradigm shift of working from home
and to short one of the biggest beneficiaries of this new work style.
Good luck my friend. Ill sell you my WORK stock at $32-38 ON FRIDAY
after earnings are released.
Do you prefer your crow sauteed or grilled? Like they say, there's always a clown on the other side left holding the bag. LOL
Damon Verial profile picture
@BlkFame Misguided people aren't clowns. Nor are narcissists, the ignorant, those of low IQ...

Though I have never met one, I believe that the "Clown" is a profession deserving of respect.

Everyone else is just losing money for silly (but not funny) reasons.
I am extremely bullish on Slack. I work for LinkedIn so we get Teams for ”free” from our parent company. When they tried to roll it out to R&D there was very nearly a revolt. Suffice to say, we still use Slack.

Your entire premise about communication apps is flawed and naive. The entire backbone of Facebook is built on messaging. You can build powerful tooling directly into these applications.

The communication norms are still developing, hence the “Hey” messages. Less noisy behaviors can be encouraged through design.

Slack has powerful lock-in and massive network effects as well. Short at your own risk.
The Market as a whole is tanking & presenting all with the opportunity to buy stocks at lower prices or $$-cost avg. down. That would be a wise choice for many investor's. Holding WORK & will acquire a few shrs on any nice substantial dips,
Wow you are a very brave and courageous person for shorting a stock this week. Wow.
Damon Verial profile picture
I wrote this article one week ago. There is publishing lag. @GameKing13
919_Investor profile picture
After dipping down from 29 do you feel $work is still a short? looking at the tape there seemed to be some buying into the end of a horrible tape
I bought Slack when it dropped to $17 this week. I’d be curious where this stands in the authors mind now since Slack like most other stocks took a big hit.

At $17 I can see Slack being an acquisition buy for Amazon or Apple.
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