Slack stock can probably deliver an IRR in the low-to-mid teens over the next decade.
The biggest misconception about the company is it’s a “chat app”. Instead, Slack is a collaboration tool that weaves and connects the hundreds of applications used by large enterprises, saving time acting as a multiplier on that IT investment.
It’s a substitute for email inside companies, allowing employees and managers to communicate in channels. With shared channels, it’s starting to build the capability for collaboration across a set of customers and suppliers while also creating inter-company network effects.
The company has a bottom-up go-to-market model where even the largest users start small and scale up usage over time. Slack is now present in the majority (2/3) of Fortune 100 companies.
The global addressable market is hundreds of millions of knowledge workers; there is ample room for continued growth.
The second biggest misconception is that Microsoft will kill Slack by bundling Teams freely with Office 365. Teams is not a proper competitor. Most of Teams usage is video calls. There are limitations on the numbers of channels that can be set up and there is no shared channel functionality. Even assuming Microsoft builds a perfect Slack competitor, the market is big enough for two or more players.
Slack has 80%+ gross margins and should eventually generate free cash flow margins of 30-40%. Modeling growth in top line, share count dilution and these scaled margins, the IRR from here is 13-14% over the next decade.
The company has exceptional leadership and culture, is responsive to customers’ needs and feedback, and invests heavily in product development and R&D. The COVID situation has been an accelerant to Slack’s business, increasing the number of paid customers acquired during the quarter.
Big picture: this is an excellent enterprise software company with an EV of about $16 billion that should—if they keep doing their jobs as well as they’ve done it so far—be worth multiples of its current valuation over the next decade.
Happy to answer any questions in Q&A.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.