Patience is Key with Slack (NYSE: WORK)

If you told investors back in April that in November, the market would be making all-time highs and COVID-19 cases would be peaking, they would rush out to buy a basket of stocks. Slack NYSE: WORK would have been in many of those baskets. It’s a business communication platform, after all.

But Slack is trading right around where it was back in April even though that scenario has come to fruition.

You may want to argue that the vaccine news throws a wrench in that hypothetical call from the future. But Slack shares are actually trading 8.1% higher than they were the day before the news came out.

Investors want to neatly place stocks in pandemic winner and loser categories. But Slack doesn’t fit into either category. Instead, it will benefit from the pandemic having happened, but it will reap the lion’s share of the rewards post-pandemic.

Last Quarter Disappointed Investors

Slack last reported earnings after the market closed on September 8. Shares plummeted nearly 14% the next day because growth decelerated from pre-pandemic levels. Let’s look at a few comparisons between Q2 2021 (the period ending June 30, 2020) and the same period a year-ago:

• Revenue growth slowed from 58% to 49%.
• Billings growth went down from 52% to 25%.
• Paid customer growth of 37% dipped to 30%.
• Net dollar retention dropped 11% to 125%.

A lot of investors were likely thinking:

If Slack’s growth is slowing down in 2020, what’s going to happen in 2021 and beyond?

Add in the company’s lofty valuation – over 25x TTM sales at the time – and the rapid sell-off starts to feel justified.

But They’re Looking at it the Wrong Way

Earlier, I said that Slack would “reap the lion’s share of the rewards post-pandemic” to quote myself. Why do I believe that?

First of all, vaccine or no vaccine, work-at-home will likely persist for most companies. It’s just a matter of whether it’s, say, 3-4 days in the office per week and working at home 1-2 days per week, or vice versa. If a company’s employees work-at-home 40% of the week vs. 80% of the week, it doesn’t dramatically change the need for a business communication platform.

Okay… But why isn’t Slack truly taking off this year?

On the last earnings call, CEO Stewart Butterfield explained that, “Even when leaders understand the deep impact that Slack can have for them, the urgency, at the moment, favors short-term solutions to solve immediate problems. CIOs have a lot on their plates right now.”

Then, there’s Slack’s billing model. The company prices its service on a per-seat basis, which means number of employees. The unemployment rate was 11.1% in June, at the end of last quarter. And that’s after it went down from the highs. As of October, it’s 6.9% and trending lower. Slack will get a nice boost in the current quarter – results are set to be released on December 9 – and moving forward.

Let’s go to another Butterfield quote on the Q2 2021 call: “Historically, it has taken new cohorts of paid teams several years to hit their peak revenue contribution. We expect the strength you saw in Q2 to materialize in a more pronounced way at the end of this year and into the next.”

So, Slack could have a number of tailwinds in 2021 and beyond.

And the company is not resting on its laurels: Slack is investing heavily into R&D, sacrificing short-term earnings for long-term market share. Slack Connect may be the company’s crowning achievement of 2020; the feature lets organizations connect several companies into one channel.

What About Teams?

Ah, Microsoft NASDAQ: MSFT Teams. The platform that is going to eat Slack’s lunch?

Not exactly.

Slack has a passionate user base and an outstanding brand.

And Slack addressed the competition on the last earnings call, essentially saying that Microsoft hasn’t made much headway in the 14 quarters that it has been competing with Slack.

Don’t Miss the Forest for the Trees

I’m expecting a strong Q3 from Slack, largely due to the decreasing unemployment rate. So, I do believe it’s smart to pick up some Slack shares now.

But this is primarily a long-term play. I like the chances that the deceleration in Slack’s growth is temporary. You don’t want to get caught looking when it revs up again.