21.02.19 | Are Slack shares worth buying?

By Jessica Sier 4 February 2019 4 min read

We have many Slack channels at Spaceship headquarters.

And there are some folk so proficient in Slack channel etiquette - there are layers and sub-layers and specific memes and in-jokes and out-jokes and bad-jokes...

Sometimes, you might notice a collection of *cough* engineers *cough* have all changed their profile picture to one theme. And if you change yours too, you’ll be invited to a new channel you didn’t know was there!

Exciting!

Anyway, as everyday users of Slack, the idea of the company’s recent IPO announcement definitely piqued our interest.

Remember, that’s one of the most powerful investment mindframes you can establish: become an owner, not a renter.

Don’t just be a passive user of a product or service (like a renter), think about whether or not you’d like to own them. That will inform your investing behaviour.  

And Slack fits (some of) the bill. In that we use it every day, our business is happy to keep paying for it and the more we use it, the more valuable it becomes (our channels are all set up, very productive conversations are saved there and most people know how to use it).

So here are the economics of how Slack makes money.

And you guessed it, it doesn’t.

Slack advertises that it is completely free to use for as long as you like and with as many teams as you like.

There are about 10 million daily active users on the platform, more than half of which are outside the United States.

But around 85,000 of those are actually paying for premium features. Things like unlimited communication history, support, statistics etc.  

(The difference between active users and paying customers: Spaceship is a paying customer, but has around 40 users.)

There aren’t any ads on the platform, and with no apparent plans to run ads in the near future, Slack relies on a simple business model, charging monthly fees listed on its pricing page from $US6.67 to $US12.50 pre-tax (if paid annually, a bit more for those customers that choose to pay month to month).

For those customers with big teams - IBM and 21st Century Fox big - there’s an enterprise solution, Slack Enterprise Grid, the pricing for which is not disclosed.  

And according to The Information, which apparently saw the internal financials last year, for the year ended in January 2018, Slack had revenue of $US221 million.

Slack projects revenue will increase by 76 per cent to $US389 million for the year ending January 2019, and then growing 64 per cent to $US640 million the year after that, according to the documents. So they’re growing pretty spectacularly.

But now let’s look at their venture capital funding.

Here is a historical list of the money the market knows they raised since inception. (All are in US dollars.)

  • April 2010: $9 million round | $24 million valuation
  • April 2011: $10.7 million | $77.4 million
  • April 2014: $42.7 million | $280.2 million
  • Oct. 2014: $120 million | $1.1 billion
  • April 2015: $160 million | $2.8 billion
  • May 2015: $40 million | $2.9 billion
  • April 2016: $200 million | $3.8 billion
  • Sept. 2017: $250 million | $5.1 billion
  • August 2018: $427 million | $7.1 billion

So Slack doesn’t make any money yet. But clearly the VC guys think Slack is really onto something, and think they will make money in the future once they’ve built out the business and achieved scale.

As such, VC have happily poured funding into the company at a pretty consistent rate and have ended up valuing the work-chat platform at just over $7.1 billion.

But, it seems the founders - Stewart Butterfield (who sold Flickr to Yahoo) and Cal Henderson - have had enough of the private markets and are looking to list Slack on the public markets. And let folks like you and me buy some shares.

And they’re planning to list via a ‘direct’ listing, according to sources, which basically cuts out the bankers who would rush around town drumming up interest from folks who would want to buy shares on the first day of trading and determine a price.

Instead, media reports suggest Slack just wants to list, offer its shares and see what the market does. (We wrote about Spotify’s weird IPO, which happened last year and was pretty much the same thing.)

By using a direct listing instead of a traditional IPO, companies aren't raising any new money, as they do in a traditional IPO. Rather, it simply creates a public market for existing investors' shares.

Spaceship’s take:

We like Slack but are definitely keen to wait and see what the market does first. Despite its rapid growth, it has some pretty steep competition in Microsoft’s Teams, Cisco’s Spark, Facebook’s Workplace, Google’s Hangouts... and if all the major players have similar products there’s a ferocious competition for market share. There’s only so many workplace chats we can use!

But we think if Slack build out a suite of productivity products they might construct a stronger moat and keep growing.

Also, did you know? SLACK stands for Searchable Log of All Conversation and Knowledge.

Enjoy your week.

Important! We’re sharing with you our thoughts on companies we’re watching for your informational purposes only. We are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance.

P.S. This header is a card deck designed by Susan Kare for Solitaire Windows 3.0. The solitaire card game was created by the intern at the time, Wes Cherry.

Words by
Jessica Sier Right Chevron

Jessica Sier is a financial journalist who currently heads up Spaceship's content. Prior to that she was a reporter at the AFR where she discovered breaking down financial bulls**t was a public good.

21.02.19 | Are Slack shares worth buying?