Using rare approach, Slack surges in stock market debut
Slack, the San Francisco-based company behind the workplacemessaging service that has seemingly taken over how employees communicate with each other, went public Thursday in a way rarely seen on Wall Street. The work messaging service grew 49% in value af ter its stock started trading Thursday under the ticker “WORK.”
Initial reaction to Slack going public was strong as the company’s shares climbed almost 49% above its $26 reference point to end the day at $38.70. Slack was expected to make 283 million out of approximately 599 million of its shares outstanding available for trading.
The company took an unusual approach to its stock market debut. Instead of the traditional initial public offering, which involves a company selling some shares to underwriters and insiders who
then offer their stock for sale to the public, Slack used what is known as a “direct listing” — which means the company simply put its existing shares on the New York Stock Exchange where anyone could then buy them.
Slack CEO Stewart Butterfield said the company used a direct listing instead of an IPO because it allowed Slack to bypass the process of raising additional capital from private investors, and because it wanted to maintain the value of its stock for shareholders.
“In the traditional IPO, you might raise a billion dollars,” Butterfield said. “(But) when you raise a billion dollars, you dilute existing shareholders’ (value) by issuing new shares. So, we’re not doing that. We’re just opening it up for trading.”
Instead of underwriters setting an opening price for Slack’s stock, the NYSE established a “reference price” of $26 per share. This price was determined by estimates of where Slack’s shares traded privately in recent months and served as a starting point for brokers to begin taking buy and sell orders on the stock Thursday.
Slack launched in 2014 and quickly was adopted by many workplaces, particularly in tech and media.
The service aims to replace traditional work communication such as email and instant messaging.
With Slack, users start “channels,” or a group chat with a specific topic. And unlike internal corporate messaging systems, Slack makes it easier for teams in different companies to collaborate on the same platform.
Slack said 600,000 organizations in more than 150 countries use the service — the bulk on a free service, which imposes limits such as how far back an employee can view archives. The company says its more than 10 million daily active users collectively spend more than 50 million hours on Slack in a typical week.
“It’s a great time for Slack to go public,” said Gene Munster, managing partner at research and investment firm Loup Ventures. Munster said that Slack is likely to benefit from investors’ “intense appetite” for software-as-a-service companies (SaaS) such as Zoom Video Communications of San Jose.
Zoom, which uses cloudbased technology for video conferencing, went public in April at $36 per share and was trading at $106 per share Thursday.
“The Slack listing is also a win for the direct listing approach, which is the future of companies going public,” Munster said. “It’ll take time to get there — maybe a decade before half of the listings are direct.”
Alejandro Ortiz, principal analyst at SharesPost, a secondary market for shares of private tech companies, agreed that Slack chose a good time to go public but added that its direct listing approach could come with some pitfalls.
“(One) concern with a direct listing is insufficient demand for the company’s shares once it begins trading, given a lack of substantial marketing and no formal allocation of shares associated with traditional IPOs,” Ortiz said. “Additionally, with no lock-up period for existing shareholders, there is an increased chance of substantially more supply than demand for Slack’s shares.”
Moreover, having such a high initial valuation without being profitable puts pressure on Slack to perform, said Daniel Morgan, senior portfolio manager at Synovus Trust.
In the February-April quarter, the company lost $33 million, or 26 cents per share, as revenue jumped 67% to $ 134.8 million. While revenue has been strong, growth is decelerating as the company matures: Revenue grew 81% in the fiscal year that ended Jan. 31; for the current year, Slack is predicting growth of 47% to 50%.
“People are going to be looking at them to execute at a high level going forward,” Morgan said. “They’re paying a lot for this company and paying a lot for predicted future growth.”
Slack is the second major tech company to start trading with a direct listing; Spotify did so in April 2018. More than a year later, Spotify’s stock is trading at $149.87, about the same as it closed at during its first day of trading.