I believe Slack will be one of the better turnaround stories. The question is timing and valuation. Due to weak technicals going into earnings, I am on the sidelines on a product that I believe has some of the best key metrics in the industry right now. I’m waiting because the probability of Slack selling off on any perceived weakness is higher than Slack rallying.
Now, Slack could rally, and that’s a chance that anyone reading this should carefully consider. I wrote in MarketWatch today why I like the product, especially for the net retention rate and stickiness. This is why I have a high conviction that Slack will have a profitable turnaround in the future.
As you’ll see in the analysis, I do not see Microsoft as a primary threat (but let’s hope the market does see Microsoft as insurmountable obstacle so that we can get the stock cheap). As a tech analyst, it is one of my strengths to truly understand the competitive positioning of products compared to financial analysts, who are numbers driven and removed from the startup scene.
Even with Microsoft Teams growing faster than Slack, this will not be a concern for Slack’s trajectory long-term. Slack is taking market share from Microsoft, not the other way around. Regardless, there’s room for both — and Slack is a pure play stock with the right key metrics.
Note: Microsoft is a recommendation of mine for cloud infrastructure-as-a-service and enterprise software revenue segments.
Slack’s profit and loss statement is more positive than its first appearance for a few reasons. To start, the company does not monetize the majority of its users. The company is doing this to gain market share, yet Slack can monetize when the market begins to hit saturation (which will not occur anytime soon as Slack has tapped an estimated 5% of the market). But, when the company is ready – that revenue will be there waiting.
Also, consider that the Slack messaging app is only 5 years old. The product launched publicly in February of 2014. Meanwhile, it already has similar financials as Okta, which launched in 2009. Zoom video has 3 years on Slack, launched in 2011. In startup years, that’s a substantial amount of time.
The third is that Slack is a data powerhouse as messaging is a superior form of data. This is not related to the P&L, but is a future driver of revenue and is a benefit currently invisible in the financial statements. The store of data that Slack has will convert to revenue in the future.
Now, back to the main question – timing and valuation. I would love to get Slack at a $10 billion valuation as I believe the company will grow to a $50 billion valuation once the market for enterprise B2B messaging matures and all of Slack’s integrations are fully understood. I would settle for a $12 billion valuation.
My hope is that Wall Street beats this stock up on the slowing growth and that sell-side analysts don’t want to take the risk on initiating a position until the herd is more positive on the company. The technicals on this stock are weak at $14.5 billion, and that was Slack’s mistake to price high rather than earn its market cap over a series of earnings reports.
I’m rolling the dice that I can get Slack cheaper than where it is today with the understanding this will be a long term holding of mine by early 2020. Nobody can tell you for sure what will happen with an earnings report (or the market’s reaction) – everything is a probability.
Knox has been watching Slack closely since the DPO and he has some thoughts for you on entry.
Technical Analysis
By Knox Ridley
Since its DPO, Slack has been in an obvious downtrend, making lower highs and lower lows. On one hand, because the price action is so new with limited inputs, there is not a lot of information to make an in-depth technical report on Slack.
However, as we mostly see with new IPOs with a fundamental story that is not fully understood, as well as no earnings to spark a reaction, price will typically align with Fibonacci ratios quite succinctly, as can be seen in the chart below.
Support/Resistance Targets
In a corrective move, we commonly see 3 moves in the downtrend, where the third move is usually the same length as the first move, and at times will extend to a ratio of the first move. This is exactly what we are seeing in Slack today.
The B wave retraced almost exactly 50% of the A Wave’s initial move, as shown in the first red resistance line around $38.45. Then Slack trended to nearly the exact length of the A Wave (100% extension) around $31.25, before making a corrective bounce to the $35 region, a price cluster that will hold significance for Slack to break through in a bullish move, which is highlighted by the green dotted line.
Another phenomenon we see in technical analysis is the significance of round numbers. This is evident in the support/resistance region around $30. Slack respected this region with force until recently breaking below it, signifying a new leg down, at which point it became strong resistance. I view this price cluster a significant psychological support/resistance.
Slack has found support again around the price cluster that coincides with the 1.382% extension of the A Wave’s which is between $28.50 region. As you can see, Slack has traded within the trend channel, highlighted by the blue lines, and seems to be looking to break out to the upside, even after making this last push towards this region.
Internal Strength
AVWAPS
I attached a Anchored Volume Weighted Moving Average (AVWAP) to the 4 major bounces, which indicated the lower highs within the downtrend. The AVWAP shows the price of Slack from each of these specific emotional points, which signify failed breakouts and the commencement of the downtrend to new lows.
The AVWAP is like a voting machine that not only looks at the price, but the amount of shares that was purchased at that price. Because of these factors, it’s a very accurate tool for seeing the exact moving averages that need to be reclaimed in an uptrend. These trends are shown in black, and represents the trend we are currently in.
As you can see, Slack has a lot of work to do in order for the bulls to regain control. These moving average will act as significant resistance on any uptrend, and once reclaimed in full, will be a strong statement that the bulls are in control. I will want to see these Slack begin taking back these AVWAPs before committing fully to the uptrend.
Relative Strength Index
At first glance, Slack’s RSI is quite weak. It’s spent the majority of its time below the 50 line, and like we see in downtrends, the 60 line of the RSI is not broken. Reclaiming the 60 line in the RSI will be crucial for Slack to get out its current downtrend.
However, there is a pattern developing in the RSI that is one of my favorite signals to trade – Positive Divergence. This is highlighted in the chart, where the price is making lower lows and the RSI is making higher lows. It’s a strong indication that selling pressure is letting up, at least temporarily, and that a reversal could be underway. Whether this reversal is corrective or the beginning of an uptrend, is too soon to tell.
It’s always dangerous to trade a stock in a defined downtrend. However, we believe Slack is a fantastic long-term play. If you want to roll the dice at the $28 region, make sure that you have very tight stops in this market, and at most, put a stop in just under to 200% extension at $24.
There is less risk at $35 or above (bullish pattern), or at the 200% extension at $24, than where it is currently priced.