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Stock Analyst Update

Slack Mixes Solid Results With In-Line(ish) Guidance

We expect continued good results from the no-moat company and maintain our fair value estimate.

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In a repeat of last quarter, no-moat Slack (WORK) beat our expectations and its own guidance and raised its revenue outlook for the year. Unfortunately for management, revenue guidance that is in line with Street expectations may not be enough to quench investors’ thirst for growth. Despite being what seems like an obvious work-from-home enabling technology, Slack is seeing macro-related pressure. We see signs of encouragement, including commentary that trends improved as the quarter progressed, including the month of August and even into early September, as well as better-than-anticipated profitability. We also think that Slack Connections will help continue to drive viral adoption.

Still, there were data points that trended in the wrong direction, macro-driven or otherwise, including a nontrivial deceleration in billing growth and declining net dollar retention and revenue guidance for the year that brackets CapIQ consensus. The shares were down sharply after the earnings release, which we view as more a reflection of the premium valuation than anything related specifically to the quarter. While we expect continued good results from Slack, we maintain our $20 fair value estimate and continue to believe that the company will have to add solutions to its portfolio to better compete. Even with the after-hours drop, we still view the stock as slightly overvalued.

For the second quarter, revenue grew 49% year over year to $215.9 million, ahead of our slightly-above-CapIQ consensus estimate of $210.2 million and the midpoint of guidance of $207.5 million. Slack added 8,000 paying customers, bringing the total to 130,000. Meanwhile, customers with annual recurring revenue in excess of $100,000 decelerated to 37% growth year over year to 985. Engagement also declined modestly sequentially but was up year over year. We view these as positive indicators for a normalized post-COVID-19 world.

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Dan Romanoff does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.