Slack (NYSE: WORK) is an important name in the enterprise SaaS space that plans a direct listing on June 20th. Investors have to consider the long-term positioning of this company in an increasingly crowded infrastructure market. At a high level, we’d say that Slack aims to be the ultimate “glue” between users and applications that is essential for any efficient business process.

But parsing the positioning of Slack isn’t an easy question. Some see it as an enterprise collaboration tool like Yammer or Basecamp but many of their features and functions are more about development, integration and automation than communication. That can make it into a kind of developer platform like Atlassian (TEAM), a development platform like Twilio (TWLO) or a kind of DevOps system like PagerDuty ($PD) or Splunk ($SPLK).

Going back to 2015 in an interview founder Stuart Butterfield did with Pando. [Slack is thriving on a cocktail of whimsy and great timing.] Here is the money quote:

Butterfield’s big a ha moment, he says, was realizing that messaging was the only business platform that could truly sit at the center of all other software systems. This is true, he believes, because it’s the only software that everyone in an organization needs to use. By contrast, platforms like Salesforce, Zendesk, and Github, for example, are highly useful (and valuable), but are only applicable within the sales, customer support, and development departments, respectively. Because everyone must communicate, a platform like Slack can be the hub that connects the entire constellation of business services.

Underlying Technology

Butterfield isn’t ashamed to explain that Slack is basically an upgraded version of the old Internet Relay Chat (IRC) system that programmers and other geeks have used for decades. The advent of other messaging platforms have caused the use of IRC to decline steadily from the 1M users it had at one point. It’s an old and extremely limited system. But the idea has been extended with many new features and capabilities by Slack.  IRC was just text chat and relied on crude client software without useful tools like search and no ability to share graphics or files.

Slack has basically commercialized the technology underlying chat with commercial features that even business users can love. But the evolution from IRC does have implications for the “flavor” of the system and what affinity users have for how it works. Everyone is familiar with email and it’s the default platform for most business communication. Using Slack is immediately different and feels more like Twitter (TWTR) than email.

The major aspect of Slack that is different is that users are asked to take more control. Using Slack involves setting up teams, subscribing to channels, learning how to use @userid notation for shared communication, setting up notifications and tailoring the interface to suit their needs. But even a small investment in setting up Slack pays big dividends for many users and turns them into fans.

Even though Slack has created a slick and fun to use interface the interaction model may not work with everyone. This is the same reason that some people take to things like Twitter and others do not. And it’s not just an “age thing” but has more to do with how people process information. The Slack model is also more appropriate for different types of work and businesses that have a certain “cadence” of activity.

Slack users often put speed, efficiency and even automation (using bots) at the top of their list when choosing tools. But even these people admit that “only a small fraction of users really want this kind of rapid and highly engaged collaboration.”

The question is what percentage of business users will end up adopting Slack as their “work UI” versus email. There are about 3B email users in the world and about 330M Twitter users.  In another venue we noted a Salesforce implementation project manager stated that “about 10-15% actually adopt Chatter into their workflow.” We’ll come back to this when we take a look at TAM.

Slack has a bold vision however which is for their software to be “a new layer of the business technology stack that brings together people, applications and data – a single place where people can effectively work together, access hundreds of thousands of critical applications and services, and find important information to do their best work.”

Slack has a Bold Vision

In order to implement their strategy Slack is focusing on large enterprises and big sales (over $100K). These come with substantial investments in sales and marketing along with ongoing support costs. It also puts the company more squarely in the sights of companies like Microsoft and Salesforce.

Market Dynamics & Competition

There have been some meaningful M&A transactions in this space. Salesforce acquired some small companies (DimDim, ThinkFuse) in 2011 and 2012 that served to build their own “Chatter” enterprise collaboration toolset. Microsoft acquired Yammer in 2012 for $1.2B. Microsoft did a reasonable job of not killing Yammer. In early 2017 they integrated Yammer into their Office 365 “Teams” and have been building on it since then. Now that Steve Ballmer is gone Microsoft is actually doing good work and even embracing integration with third party software and operating systems. Microsoft “Teams” is now a primary competitor to Slack in the enterprise.

In July of 2018 Atlassian (TEAM) divested their own messaging product (HipChat) to Slack in a surprising move. Atlassian felt that they would need to spend heavily to build their own messaging platform in what they described as a “crowded space” and decided instead to use recommend Slack and integrate their product set with it. The “IRC flavor” of Slack makes it a perfect fit for development types which are the core customers of Atlassian. This transaction helped cement Slack as a kind of de facto collaboration tool for many developers.

There are lots of other collaboration tools but many have specific focuses like project management, video, one-to-one or document authoring. Companies like Smartsheet (SMAR) and Zoom (ZM) provide some level of this type of collaboration. Even Google has some basic capabilities like Hangouts as part of their “G-Suite” of productivity tools.

We acknowledge that Facebook (FB) has made noise in this space with their “Facebook Workplace” but so far it has been mostly invisible in the market and given their issues managing data and privacy it’s hard to picture corporations wanting any of their sensitive information to be on a platform owned by Facebook. Users of the software have described at as lacking many key features but that they may take a fresh look if Facebook decided to really invest in it.

Slack is certainly the market leader – due in no small part to the “free” initial usage tier that makes it very easy to get new users. Their software is also highly robust with the broadest and best set of integrations out there.  It should also be noted that Slack has been very active in building an “app community” of developers that are building on Slack to make it into more of a platform.

Direct Listing Difference

Slack (WORK) shares will be opened for trading on June 20th based on supply and demand in the open market. It’s worth noting that there are no lockup periods in this sort of situation and some investors have already converted their “B” shares to “A” which will be free to trade on day one. We’d expect Accel and Andreessen Horowitz to be looking to exit their positions of 119M and 66M shares respectively. Social Capital would probably sell their 50M shares. We don’t know what Softbank will do with their 36M shares.

Many new issues run up because supply is artificially limited by the number of shares issued. This isn’t the case with a direct listing so investors expecting a large pop and sustained rally after the IPO may be disappointed. Increases in the share price are likely to bring out additional supply that should serve to dampen any major price movement.

Because they are not issuing new shares and it’s not an IPO there are no built in banking fees. However Slack has set aside $22M to pay the “advisors” that are part of the listing. The “lead” banks will take most of this but it’s also expected to pay a raft of firms to provide support like research coverage, conference invitations and market-making.

Fun “related party” Facts

We often find very interesting tidbits of information in the “related party” section of the S1. If you’re the wife of a CXO in a company like Slack this might be a very good time to start your own company. The “former domestic partner” of Stuart Butterfield has a company (Pacific Content) that was used to “created branded podcast episodes” for the company in 2017 and 2018 to the tune of $1.388M.

The wife of Cal Henderson, the CTO, founded a company called Rsquared Communication that was hired for “communications and media relations services” and paid $1M. We’re not suggesting that either Pacific Content or Rsquared didn’t do the work required. But given the common nature of the work it’s a questionable decision for an IPO-bound company to award the business to these sorts of “firms.”

TAM, Valuation and Stock Conclusion

Slack believes they have a $28B market opportunity. This number feels too high by at least half. For one thing there are a large number of different types of “workplace business technology software platforms for communication and collaboration.” But the real opportunity is even less clear given the “10 to 15%” of people that desire the type of engaged messaging and participation that Slack provides. If that turns out to be true then the market opportunity is more like $3-4B – still a big number and room for lots of growth but a very different “investment story” in terms of growth and valuation.

For now let’s take the TAM at face value as well as the long-term guidance. If we dial that in we can get to a PFV of around $28. It’s been reported that shares of WORK are trading at $31 in secondary markets ahead of the IPO.

In the high-20’s or $30 this one is too rich for me. That’s over 20x *projected 2019 sales* which is just too high. Slack is a great product and a great tool for one segment of the professional population. It’s not going to be for everyone and Microsoft has a strong position in this market with Office365. I will mention again that without a lockup agreement additional shares will become available as the price increases – so we don’t have an artificial limit on supply in the case of this deal.




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