Cultish devotion to Slack in offices around the world will propel the workplace collaboration platform to a $16 billion IPO today. But investors who have fallen under the charms of this hotter-than-hot unicorn are about to plunge their money into an extremely risky public offering.
The idea that Wall Street only wanted IPOs from companies with proven business models has turned out to be nonsense. But even by such lowered standards, Slack’s odds of building a sustainable company seem long at best.
It’s not just that the company is vomiting red ink. Slack notes that it has posted “significant net losses in each year since our inception”. The last three years, that has included losses of $146.9 million, $140.1 million, and $138.9 million in the respective fiscal years of 2017, 2018, and 2019.
Of course, those losses have shrunk as a percentage of revenues, which shot up from about $100 million to $400 million during those three years.
But, the company emphasizes that post-IPO, those losses are likely to start climbing rapidly again:
We expect our operating expenses to significantly increase over the next several years as we hire additional personnel, particularly in sales and marketing, expand our partnerships, operations, and infrastructure, both domestically and internationally, continue to enhance Slack and develop and expand its features, integrations and capabilities, and expand and improve our application programming interfaces, or APIs. We also intend to continue to build and enhance Slack through both internal research and development as well as selectively pursuing acquisitions that can uniquely contribute to Slack’s capabilities. In addition, as we grow and become a public company, we will incur additional significant legal, accounting, and other expenses that we did not incur as a private company.
At the same time, Slack’s growth is slowing. It has forecast annual growth of 49% for the year, down from 67% annualized growth in the first year of its fiscal quarter. It’s also below the 82% growth and 110% the previous two fiscal years.
Yes, that’s typical as companies get larger. But if they are wildly unprofitable, like Slack, and their expenses are going soar, like Slack, then slowing growth heading into an IPO is problematic. And that doesn’t even count ongoing competition from companies like Cisco and Microsoft in this realm.
The result, of course, is that Slack makes the usual disclaimers companies make in such filings about not being to be sure it can ever be profitable. In this case, it sounds more ominous for likely being true.
Of course, we’ve seen a parade of IPOs from money losing unicorns this year. Pinterest has done okay post-IPO, managing to still trade above its opening day price. Lyft surged on the first day of trading, and then plunged and has spent most of the year of dreaming about getting back to its IPO price. Uber finished the first day of trading down, and then fell some more but has now almost scratched its way back to its IPO price.
Slack’s performance today will be hard to predict as it’s using the direct listing method. The company won’t actually raise any money, but will instead take the same path as Spotify previously and just let its stock begin trading today.
The latest word is that the initial price of the stock will be $26 per share for a $15.7 billion valuation, but that’s more of an imprecise attempt to estimate the beginning value rather than a fixed number determined by the company. Expect it to go much higher today.
Because love is blind. And people, probably including the humans on Wall Street, love Slack. So a big-first day will involve a lot of emotional investing and a desire to be in on the hot thing that everyone is talking about.
It’s the longer term fuzziness in Slack’s business model. that should worry investors. But don’t bet on it.