September 30, 2019 BARRON’S 25
Tech Trader
A Buying Opportunity in the IPO Carnage
By Tae Kim
INVESTOR CONFIDENCE IS A FRAGILE THING.
Just a few months back, it seemed as if everyone
was clamoring for the latest technology initial public
offerings.Now,thesentimentisgoingtheotherway.
Manyof2019’sslateofhigh-profilepublicofferings—
fromride-hailingcompanies Lyft (ticker:LYFT)and
Uber Technologies (UBER) to consumer internet
firms Pinterest (PINS) and Chewy (CHWY)—have been hammered.
Thatgroupisdownmorethan30%onaveragefromitssummerhighs.
But it’s an IPO that never happened—from WeWork’s parent We
Co.—thathassentthebiggestshudderacrossWallStreet.
Intalkingtopublicinvestors,therealestatefirmmet
resistance even matching its $47 billion private market
valuation.Cuttingthevaluationbymorethanhalf,appar-
ently, wasn’t enough to entice public investors.
That reality has led to a reassessment of risk. “The
IPO window has closed for business models based on
growth at all costs with excessive private market valua-
tions,”KathleenSmithofRenaissanceCapital,aprovider
ofinstitutionalresearchandIPOexchange-tradedfunds,
wrote in an email to Barron’s.
Sureenough,thispastweekwasparticularlypainfulforhigh-profile
IPOs(seefeatureonpage10). Peloton Interactive (PTON)fell11%on
its first day of trading on Thursday, and closed the week down 13%
from its IPO price. By the end of the week, entertainment firm En-
deavor Group decided to pull its IPO altogether.
But there is a silver lining in the carnage. Sentiment-driven melt-
downsofferbuyingopportunitiesincertainlong-termwinners.Aswe’ve
notedheremanytimes,investorsarewell-servedbyfocusingoncompa-
niesthatdelightcustomerswithgreatproducts.Ifacompanyhasthe
potential to be a best-of-breed category killer with platform-like net-
work effects, then all the better.
One 2019 debut that fits the bill is Slack Technologies (WORK).
(Slackdoesn’tquitequalifyasanIPO,sincethecompanybecamepublic
throughadirectlisting.)Thecompany’sproductbasicallyreplacesemail
inside corporate offices.
Asahard-coreSlackuser,Icanattesttohowit’simprovedintraof-
ficecommunicationanddocumentsharing.ThemoreyouuseSlack,the
more valuable it becomes. The service not only replaces email; its ar-
chiveofmessagesanddocumentsbecomesasuperchargedfilecabinet.
AndonceSlackgetsingrainedinthecorporateworkflow,it’snearlyim-
possible to replace it, pointing to the company’s pricing power.
Marcelo Lima, a hedge fund manager at Heller House whose firm
ownsSlackshares,isbullishonthecompany,citingitscustomerengage-
ment.Slacksaystheaveragepaiduserspendsninehoursperworking
dayconnectedtoSlackwith90minutesofactiveuse.“It’srarethatone
canfindabusinessthatisfounder-led,mission-driven,withveryattrac-
tive economics, and an enormous market opportunity,” he says.
OnemajorconcernforSlackinvestorshasbeenincreasingcompeti-
tionfrom Microsoft ’s(MSFT)comparableproductcalledTeams.But
WilliamBlairanalystBhavanSuriplaysdownthecompetitiverisk.Ac-
cording to his channel checks with customers, people are using Slack
dramatically more than Teams, even when both are deployed.
“Microsoft is a fairly limited product set in terms of functionality
comparedwithSlack,”hesays.“Theintegrationsaremateriallyless.”
Unlike some members of the 2019 IPO class, Slack doesn’t face
financing issues. The company has nearly $800 million in cash. It
expects to burn through roughly $100 million in cash this fiscal year,
but that includes one-time costs of $30 million related to
the direct listing.
So where does the stock go from here?
In June, shortly before Slack went public, Barron’s
wrote positively about the company, noting its utility
insidethenewsroom.Butweurgedpatience:“Replacing
email is a huge, and welcome, opportunity, but it’s going
totaketime.Investorsshouldwaitforthehypetosubside
beforejumpingintoSlack’sstock.”Thattimemaybehere.
After its direct listing on June 20, Slack’s first trade
came at $38.50. It’s since fallen 43%, to a recent $22.06. Because a di-
rect listing doesn’t involve raising new funds, insiders are not bound
by any kind of lockup agreements. Much of the selling pressure on the
stock has likely already been exhausted. That’s an important contrast
from recent traditional IPOs, where lockups are in place for six
months after the debut.
Earlierthismonth,Slackreportedfinancialresultsaboveexpecta-
tions.Salesgrew58%yearoveryearinthefiscalsecondquarter,and
the company now has 720 customers paying at least $100,000 a year.
Slacksharessoldofffollowingthereport, withsomeinvestorsexpecting
an even larger beat. That view could prove shortsighted.
MorganStanleyanalystKeithWeisssaysthereare350millionusers
paying for productivity suites worldwide. At a rate of about $100 per
user,that’samarketof$35billionayear.IfSlackcanattain15%share
ofthismarketwithin10years,anassumptioncurrentlyinWeiss’finan-
cial model, it equates to about $5 billion in annual sales.
Wall Street expects the company to generate only $609 million in
sales this year. Even if Weiss’ $5 billion estimate is too high, there’s
hugeopportunityaheadforSlack.“Wethinkthisisabusinessthatcan
grow50%to60%sustainablyover[eachof]thenextfewyears,”William
Blair’s Suri says. “With a reasonable revenue multiple five years out,
you’re probably more than triple the stock price today.”
Years ago, there were a couple of other category killers that went
througharoughstretchintheirearlydaysaspubliccompanies.They
were Facebook and Google.
email: [email protected]
Slackremains
acategorykiller.Take
itfromthisuser.
Thestockisdown
morethan40%.