Slack Lacks Punch of Other Unicorns
Comparison to Zoom, Uber, Lyft, and Pinterest Leaves Slack Behind for Potential IPO Investors
By Lior Ronen, CEO, Finro Financial Consulting
Slack is slated to offer shares to the public through a direct listing as early as June 20. Is Slack (WORK) a good investment, or are you buying into the hype of the latest Unicorn IPO? One way to make a smart decision about the latest hyped IPO candidate is to compare it to others in its category, a peer group. To get perspective on Slack, I also examine four other unicorns that either went public lately or have filed for an IPO: Zoom (ZM), Uber (UBER), Lyft (LYFT), and Pinterest (PINS).
Although I’m not a Slack user, I appreciate its appeal and strong customer loyalty:
It’s a central repository for information, ideas, conversations, and documents about a specific topic or project.
It uses many features that also exist in social media, such as tagging / mentioning a team member, adding a hashtag topic for internal threads, DMs, and more. These features make Slack more intuitive and straightforward.
Integration with Google productivity apps makes it easier to update files within the app.
It’s an industry standard. Team members and other contributors are used to Slack, so we use it as well.
Slack Closest to Zoom
Of the companies mentioned above, Slack is probably closest to Zoom. The two companies generate revenue from enterprise subscriptions while maintaining a significant proportion of free users as an inducement to scale up. The other three companies in the list generate revenues either from ads (Pinterest), or ride-hailing and associated services (Uber and Lyft).
Let’s look at their positioning. While Lyft and Uber lead their niche of ride-hailing services (each with a different approach and business model) and Pinterest provides a unique social offering, Slack and Zoom offer a narrow and specific service that is also provided by the familiar tech giants.
The great advantage that Zoom and Slack over this peer group is the high level of client satisfaction. Users prefer to use Slack or Zoom over the similar services that Microsoft (MSFT), Alphabet (GOOGL), Cisco (CSCO) and others offer, even though the other services might be more compatible with their entire enterprise software suite.
That’s a powerful asset. I’m not sure how sustainable it is over the long haul, or how helpful it is for top-line growth. From a comparison of the business models and market positioning of the five companies, Slack is not a significant buy.
Operating Margin and Revenue Growth
Comparing Slack’s operating margin over the last three years to the four other Unicorns, I don’t see any eye-popping improvement trend that’s unique to the company. Looking at Slack's three-year CAGR, it’s high, but not as high as Lyft’s or Zoom’s.
Based on its operating margin trend and three-year CAGR, Slack is not a clear-cut buy.
Source: Companies’ S-1
*Latest FY = 2019 for Slack and Zoom; 2018 for Uber, Lyft and Pinterest.
** FY -1 = 2018 for Slack and Zoom; 2017 for Uber, Lyft and Pinterest.
** FY –2 = 2017 for Slack and Zoom; 2016 for Uber, Lyft and Pinterest.
The case for Slack. See infographic.
Clear Path to Exit
When looking at these high-profile unicorns, I understand that the main beneficiaries of an IPO is the hedge funds, private equity funds, and VCs holding their shares. These investors are eager to sell at the IPO, and prefer to sell even before the IPO if they can get a good price. They want to minimize risk.
How could the average individual investor gain from buying at the IPO? Either from price appreciation over the years, which could also be achieved by purchasing the stock at a later stage, or from a corporate event such as an acquisition that could potentially increase the company’s value.
Lyft and Uber, in the context of the broad autonomous vehicles market and the ride-hailing market, have a bright future. I’m not sure they could reach achieve their rosy 5 and 10-year projections. I believe that both companies could either grow significantly in the future as the demand for their services rise, or be acquired by an even larger company as an entry play into the autonomous vehicles market in the future. Either way, I see a clear path to exit.
Pinterest, I believe that it will continue to be a small social media company until it launches some game-changing features, which I don’t see happening soon.
For Zoom, the story is more complicated. Zoom, in my opinion, has a product that is superior to Microsoft’s Skype and Google’s Meet / Hangout. However, in the long run, I don’t see Zoom attracting a significant number of users from Microsoft, Google, and Cisco. Zoom will either maintain its niche or will be acquired by Atlassian, which currently owns 5.1% of the Class A shares.
As for Slack, I can’t see how the company will remain independent for the long run. Many companies use the Microsoft software suite that is compatible and reliable. Google has many different services that could easily replace Slack for small businesses.
Facebook’s (FB) Workplace service could easily dominate this space. Currently, Facebook’s service is flying under the radar, but it could become a significant player in the event of an acquisition of Slack. This is a particular, and purely hypothetical, exit scenario which could work better for Facebook than for Slack.
Based on those potential exit scenarios, Slack could be considered a good holding for a future M&A play. However, without any specific timeline or any additional indicators, investors should not buy Slack based on that and then wait indefinitely.
Investors looking to add a high-profile tech unicorn to their portfolio might have a better alternative than Slack.