Long Slack
🏡 Remote work is here to stay
In the first quarter of this year, nearly every knowledge-work based company in the world was forced into a 3+ month trial of letting their employees work remotely... and many of them concluded that it isn't so bad. It wasn't perfect, but the trial did enough to disrupt inertia that Facebook, Twitter, Square, and Shopify all announced they would become more remote-friendly. Also Slack itself - but ironically to a lesser degree 🤷♀️
So far, employers are intrigued because it's less expensive and employees like it for the flexibility. To be clear, I don't think companies will suddenly start giving up their HQs. But if even 20% accept remote work as a normal part of life that will significantly increase the value of investing in best-in-class communication & collaboration tools.
All I'm saying is, if you're the CEO of a company that makes this type of product with 90+% customer retention and 130+% net dollar retention you might not be so sad that a global pandemic happened.
📹 Okay... but Zoom though
If all that is true, isn't Zoom an even better bet than Slack? First, let's state the obvious - that Zoom is more expensive - its revenue multiple is 2.5X that of Slack. Zoom's user base has also exploded but I would argue that isn't necessarily as good for them as it seems. Both Zoom and Slack have generous free tiers of their product. It's a marketing expense that the company hopes to eventually convert to revenue. At the beginning of this year Zoom's core use case was probably 95% business and 5% consumer. I wouldn't be surprised if this has flipped. If a significant majority of Zoom's users are now consumers, will they ever convert into revenue? Sounds like that marketing expense just got pretty large and pretty uncertain. Meanwhile, it seems that the makeup of Slack's user base has not changed and it is acquiring paid customers at a substantially higher rate than the beginning of this year.
It's also worth mentioning that the switching cost of moving away from Slack is much higher. It becomes the system of record of all past communication at your company. It integrates with every other app at your company. But switching from Zoom? I guess your meeting attendees will have to click a different link next time.
💬 Okay... but Teams though
I'll concede that Teams may very well be the better choice for companies that have gone all-in on the Microsoft Office suite. This has certainly had a dampening effect on Slack's growth and as a result Slack failed to hang on to its lofty IPO valuation last year. But not all is lost.
Microsoft deserves respect for having copied hard, fast, and well. It was a necessary defensive move to prevent Slack from becoming the central nervous center of productivity for Office customers. They have the home court advantage vs Slack when it comes to integrating with their own suite. The flip side is that Microsoft has none of the same advantages outside of its existing customer base and there are a lot of people in the world that don't use Office. GSuite alone has SIX. MILLION. CUSTOMERS. Slack has 120k so maybe there's still room to grow.
🐮 The Bull and the Bear
It's interesting to consider what the bull and bear outcomes might look like for the stock.
Bullish outcome: Slack maintains its 2019 growth rate of 57% through this year due to the effects of COVID. If three years from now growth slows to 35% and operating margin reaches breakeven then it will have a similar business profile to Atlassian. At Atlassian's revenue multiple, Slack would be worth about $60B in 3 years (58% IRR at our cost basis).
Bearish outcome: Slack's growth just hits its management guidance of 35% this year. Three years from now growth decelerates into the mid 20's. Slack's revenue multiple compresses like New Relic. With that profile Slack's valuation would drop to about $10B (-13% IRR at our cost basis). Obviously not a great outcome but possibly an attractive acquisition target for Google or Salesforce to compete more effectively with the Office Suite.
🔮 The Intangibles
Times of massive change + great team + capital & resources = a recipe for uncommon outcomes. Slack appears to have all three:
The change: a once-in-a-generation pandemic to disrupt our inertia
The team: top tier talent from the board and the ceo on down
The capital: $750M to be aggressive when opportunities come
Let's see what happens.
Next Thesis is long Slack with an average cost basis of $27.5 as of publishing. Assume the usual disclaimers. Do your own research before investing.