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We Think Slack Technologies Will Work Out In The Long Term Though We're At Neutral On Valuation

Jun. 10, 2020 3:15 PM ETSlack Technologies, Inc. (WORK)AMZN, CRM, MSFT, ZM21 Comments

Summary

  • Formerly a stock known only by tech folks, Slack Technologies has shot to prominence as a "Work From Home" stock during the Covid Crisis.
  • This is a young public company that has yet to master the art of the earnings dance.  So far the stock has dropped on every earnings release.
  • In addition, the market's belief that Slack is like Zoom, but different, is just not correct - that's one of the reasons the stock fell after last week's Q1 earnings.
  • We think this company can be a winner.  But the stock price is high vs. fundamentals and we're looking for a better moment to go all-in.
  • For now, we're at Neutral, but looking for reasons to go to Buy.
  • Looking for a portfolio of ideas like this one? Members of The Fundamentals get exclusive access to our model portfolio. Get started today »

DISCLAIMER: This note is intended for US recipients only and in particular is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.

A Little Context

Our business, Cestrian Capital Research, is run by old folks. These latest incarnations of cloud computing are a very long way from our first rodeo. Between us, we cut our teeth on telnet and timeshare, once marveled at the blazing transmission speed of a 28.8Kbps modem, and if you pushed us we would admit to still trusting a command line interface more than a GUI, because, well, who knows what that GUI is doing when we aren't looking. You get the picture. Just because something is the new new thing doesn't make us excited. If anything, the opposite. So when we say below that we think Slack Technologies (NYSE:WORK) might have a bright future, don't assume

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This article was written by

Cestrian Capital Research, Inc. is an independent, SEC-regulated investment research business led by CEO Alex King. Alex is a professional investor with 3 decades of experience. Cestrian specializes in covering growth stocks, index ETFs and index options, long-run investing, swing trading and risk management via hedging.

Alex runs the investing group Learn more.

Analyst’s Disclosure: I am/we are long WORK, ZM. 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.

Cestrian Capital Research, Inc staff hold long position(s) in WORK and ZM.

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 (21)

J
Thank you so much for your externalized internal monologues. I was hoping you'd address WORK eventually after the articles on Multibaggers and Cloud. I have a tiny position - got in at $25 - that I hold with the sole scope of making my children drop their jaw when they get to take a peek at my portfolio after I'm gone. (I think I'm about as old as you, Ms. Cestrian, so... in a 100 years?). But I wouldn't say no to an Amazon acquisition and dropping my own jaw while I'm still around.

I work in a nerdy enough environment that my institution decided to switch from Slack to open-source alternatives 2 years ago. Still rolling my eyes about it as we're now juggling inferior workflows on RocketChat and Mattermost (plus email for the extreme contrarians) depending on the personal opinion of the team lead. I've been missing Slack so much that buying a few shares has been a no-brainer.

Teams has been pushed onto us for distance learning during lockdown. The real :facepalm: experience. I can't resist the urge to simulate modem sounds when I watch it start. (My kids hate it. Me making modem sounds, not Teams.)

Here's to Slack taking over, not because I own it, but because it makes life easier.
Cestrian Capital Research profile picture
@JamsODonnell Interesting perspective and thanks for the kind words!
Kamil Kolacek profile picture
Thanks for the great article. Slacks a beast, accumulate now so you avoid FOMO & in a couple of years admonishing yourself with 'Man, I wish I would have bought $Work when it was at $32.'
W
I accumulated a few shrs last yr in November in the lower $20' shr. when WORK took a nice drop in pps. Holding for the long-term until either the price hits my target of $45 or they M&A by a bigger tech. M&A is a possibility.
Puche profile picture
Very much enjoyed the balanced article! Nice job!

I spend a fair amount of time focused on the SaaS space an own a bunch of players some of which I've written about extensively on SA. I'm sure the SA community would have appreciated you delving into the financial statements in a little bit more detail. Lots of excellent information reported in quarterly and annually filings. IMO looking at the surface of SaaS companies doesn't being to tell the whole story.

For example many SA members were scared away by OKTA and VEEV's valuations back when the stocks were down in the $30s only to watch them explode to approximately $200+. To invest in SaaS companies requires extensive DD and strong analytic skills.

Thanks again for the balance article.

Of course that's just my two cents. Slow and steady! Good luck to all!
Puche profile picture
@Cestrian Capital Research, thanks for the link. I figured you understood the business. You may want to think about building the link into your article so the SA community would get even more value out of your article. Either way, I enjoyed the read and your take on cloud financials.

For the record don't underestimate your Point 5 in your link "Clean Balance Sheets". My two cents!!

Best of luck to you for continued success!
Cestrian Capital Research profile picture
BTW in our subscription service we have this as a potential "Multibagger" - should have mentioned this in the note. See our recent blog post here: seekingalpha.com/...
SpikerLexus profile picture
Some food for thought a few days old but we all are thinking it.
Will Amazon Buy Slack?
The war for video meetings heats up, and Slack lines up with Amazon Chime.
medium.com/...
Cestrian Capital Research profile picture
@SpikerLexus Got to be a possible deal. Call it un-modelable upside.
D
Nice comment. I am a user, have a long term view and very long the stock. I have no doubt collaboration provider is such a no-brainer in efficiency improvement of any knowledge worker in this digital world. Your comment about sales cycle is valid, but I think real benefit of COVID will come in acceleration of revenue in a couple of quarters when a large number of free organisations added become paid. I do believe 35-40% growth is possible for a few years. Bears worry the most about MSFT capping growth of Slack. My feeling is that there is a place for both, but I could be completely wrong.
Cestrian Capital Research profile picture
@Doordarshi If we had to call it we would say MSFT will struggle in the category. They are behaving in a fairly aggressive way towards WORK (eg. giving Teams away, pushing it hard to existing O365 users - like us) - we haven't seen MSFT behave like this under Nadella. Says to us that they have a product problem here. Also see an MSFT acquisition of Slack as unlikely at this point given the sunk cost into Teams - they would have to admit they were wrong. So best guess, based on gut only, is that WORK prospers in the category and MSFT stumbles. But have no evidence for this, only gut feel.
M
WORK will grow steadily over time. The revenue from increased adoption will compound and persist in a way that is going to surprise most people. Yes, the valuation is lofty but we all know how that goes. Decide whether you want to pay that premium now or when the price is likely double in a year or two.
Cestrian Capital Research profile picture
@Mike Rotch 2 Speaking for our staff accounts - agreed. That's based on experience of watching companies like this snowball over years and then looking back and saying wow that "overvalued" company was really cheap back then. Gut says this is the same. But again with a house view perspective we can't quite get to Buy - yet.
u
sold WORK at a gain just before earnings, good day to buy back in with DOW futures down 700
DoctoRx profile picture
Nicely-written article. I went long WORK today based on numerous comments all over SA saying that Slack clobbers Teams. Unlike Cestrian, I posit it's poised to play catch-up to the Q's. If not, you have the Buffett point about focusing on buying great co's rather than a seemingly cheap stock.

I am also very much long MSFT and various other techs.
Cestrian Capital Research profile picture
@DoctoRx We added to staff positions today too. Gut feel is this one can run - we have it as a "Multibagger" potential stock in our subscription service. Just can't quite go to a house view of Buy, yet.
George Moriarty profile picture
@DoctoRx I happened to see this comment, and thought I'd share my experience. I was on Slack at SA and moved to a Teams environment at my new role, and was initially terrified/horrified at Teams. From the user perspective, Slack is 100% easier to use, better UX (and was the devil I knew). But, six months in, I would say that while MSFT again has missed the mark on UX, my initial fear of Teams has proved wrong. The integration with Office is excellent, and in 6 months, we've had few outages and issues have often been EBKAC (error between keyboard and chair). In sum, Slack is great, but MSFT seems to have the upperhand in enterprise, so I'd say "clobbers" might be an overstatement. (No direct positions in either)
J
Thanks for the good article
Cestrian Capital Research profile picture
@Johnnie Grossmann You're welcome, thanks for reading it!
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