Slack currently has negative sentiment surrounding the company and the stock. We’ve seen a few instances where Slack is lumped in with the IPO unicorns this year, such as Uber, Lyft and WeWork. We believe this is unwarranted, but regardless, this is the information being reported. Meanwhile, we see companies with more positive sentiment experiencing deep sell-offs around the earnings report.
Keep in mind, Slack’s growth has been slowing – from 82% last year to 47-52% growth year-over-year over the past couple of quarters. Revenue came in at $145 million compared to $140.7 million expected by analysts with reported EPS negative 14 cents compared to expected EPS of negative eighteen cents. The stock dropped 16% following its last earnings report.
Slack is guiding for third-quarter revenue of $154 million to $156 million. Judging by the reactions to previous earnings reports this quarter, Slack’s report has to be perfect to not accompany a sell-off.
Could Slack have a surprise earnings report? Yes, it could, but right now it’s a coin toss. It’s a gamble to own Slack right now based the stock trading at the bottom for slightly more returns. The other option is to wait for a breakout confirmation for slightly less returns. There has been institutional interest on both the long and short side of Slack, which has established the current trading range as well as important price targets for breakouts (more on this below).
Many analysts are focused on Microsoft Teams, which is a mistake for a few reasons. Microsoft has dominated business communications for thirty years with an estimated 400 million users on Microsoft Outlook. I assume Microsoft Teams will leverage this user base and sign-up many more users than the 20 million that Teams currently has. Slack’s addressable market is primarily the non-Outlook users (although many users have both Outlook and Slack). The addressable market is hard to exactly quantify but there are 100 million Mac users and 70 million G-suite users. Slack’s addressable market should be somewhere in this range of alternative OSs and productivity tools.
Workplace chat applications are very early but will replace other enterprise and small-to-medium business communications moving forward. This is an important trend to watch as Slack’s engagement is unheard of, with the application open 9 hours per day and boasts engagement of 90 minutes per day – compared to Facebook at 58 minutes, Instagram at 53 minutes and YouTube at 40 minutes per day. These social companies monetize through advertising, but in time, Slack should be able to charge companies for the usage once the trend breaks out.
We know from Microsoft’s user base of only 20 million, or 5% of their addressable market, that we are dealing with a very early trend. Slack will continue to be on our watchlist regardless of what the earnings come in at.
Technical Analysis
By Knox Ridley
Slack’s downtrend does not seem to be over just yet. It bottomed at $19.54 and has been range bound between the $20 and $23 range. There are heavy buyers at both regions, so it will probably take an earnings surprise to break the range.
Based on the current structure of the most recent uptrend, it is obviously corrective in that it overlaps. We do not have a clear 5 waves up, and until I see that, I would be cautious of any bottom.
Furthermore, the MACD is approaching its own resistance, which it will need to break through to further confirm a new uptrend. The RSI is making lower highs while price is hitting the $23 resistance zone, indicating that the momentum is fading as well. And, the volume is fading as we approach the $23 region.
All of these factors are pointing towards another retest of the $20 support region. Even if we do get a much deserved breakout, until Slack shows a clear impulsive 5-waves up off the bottom, and clears through the above retracements with heavy volume, I’d be cautious and expect one more leg lower before we finally get a real buying opportunity for the long haul.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.