Shares of work collaboration platform company Slack (WORK) have been seemingly left out of the work-from-home (WFH) market rally over the past six months, even as the COVID-19 crisis has created an ideal environment for the company outperform. Has the market gotten this story wrong?
The company will make its case when it reports second-quarter fiscal 2021 earnings results after the closing bell Tuesday. While the stock is one in a basket of WFH companies that are seen as beneficiaries during the pandemic, Slack shares (up 4.5% in six months) has grossly underperformed the likes of Zoom Video (ZM), DocuSign (DOCU), which have posted respective 6-month gains of 216% and 141%.
Slack’s cloud-based work-focused collaborative communications platform allows users to send messages, images, documents, and more to groups or individuals. At the end of the first quarter, the company added a record 12,000 net new paid customers, while revenue rose 50%. But that 50% growth was merely flat from the fourth quarter, which disappointed investors who feared increased competition from Microsoft (MSFT) and Google (GOOG, GOOGL), among others, were taking a toll.
Since the first-quarter release, Slack stock has fallen 23%, compared to a 20% rise for the sector. While the valuation looks compelling here, the company has not shown (by its guidance) the level of confidence investors wanted to see as the pandemic accelerates the remote-work environment. As such, on Tuesday, Slack needs to show it can carve out enough market share as the global workforce shifts digitally. Just as important, it must demonstrate it can deliver sustainable and predictable long-term profits.
For the three months that ended July, Wall Street expects the San Francisco, Calif.-based company to lose 3 cents per share on revenue of $209.1 million. This compares to the year-ago quarter when the loss was 14 cents per share on revenue of $144.97 million. For the full year, ending in December, the loss is expected to be 16 cents per share, while full-year revenue of $871.73 million will rise 38.3% year over year.
The consensus estimates for both the top and bottom lines don’t deviate much from what Slack management guided for, which called for a revenue range of $206 to 209 million (suggesting growth of 43%), while operating loss per share would be between 3 cents to 4 cents. These estimates, which disappointed investors, look overly conservative, particularly given the company’s strong rate of paid customer additions. Not to mention, the company opted to raise its full-year revenue guidance and improved its loss per share outlook.
In the first quarter, paid customers surpassed 122,000, topping the 100,000 it had in last year’s quarter. What spooked investors, however, was the company warning that the pandemic posed a risk to its business, saying that a quarter of its revenue came from companies with less than 100 employees, which suggests that pandemic-induced business closures, while a potential tailwind, could also impact its revenue. Within that demographic, the company cited an increased rate of churn.
In other words, while Slack offers an easy-to-use, high-quality collaborative platform, on Tuesday the company must show that it has lasting power not only by delivering a strong beat, but also issuing upside revenue guidance with growth acceleration.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.