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Workplace messaging app company Slack debuted at the NYSE with a value at $20bn, 48% above the reference price set by NYSE $WORK followed Spotify in a rare direct listing. The company has seen decelerating growth recently with investors betting on more paying customer conversions.

Slack IPO Launch

Day One For Slack $WORK

The first trade was confirmed shortly after midday in New York, after traders at Citadel Securities were able to find a clearing price for the initial buy and sell orders. The high was 42.00 after opening at 38.50 and closed at $38.62 on it's first day.

WORK Day One

Reference Price

The NYSEset a “reference price” of $26, based roughly on the price of private trades over recent months, the stock traded privately in a range of $25.75-$31.50 recently. Renaissance Capitalestimates that 283 million of the 599 million shares outstanding will be available to trade (47%) after the direct listing.

Slack traded at $11.91 when it raised money nine months ago.

Direct Listings

Direct listings allow going direct to the public without underwriters. The aim is to allow all the public an opportunity to buy rather than the 'Chosen few' but this is also not without risk. Direct listings do not involve the advance book building or underwriting provided by investment banks in a traditional IPO. They also don’t put any restrictions on shareholder sales.

Speaking ahead of the first trade, Stewart Butterfield, chief executive officer, acknowledged that there was some risk to allowing shares to find their own level, and that this could lead to volatility in the share price “in the first day or two.” His argument against that was, “diluting existing shareholders by 10 per cent didn’t seem prudent,” . Alan Shim, chief financial officer, added that using a direct listing would avoid distorting the market by artificially restricting supply. “When you have unrestricted supply and demand, the market finds a level. We want the market to do its job.”

“The big thing for us was in the traditional IPO, it’s the company that’s offering shares, you might raise, you know, a billion dollars or something like that,” Slack chief executive Stewart Butterfield said Thursday during an interview on CNBC. “When you raise a billion dollars, you dilute existing shareholders, by issuing new shares. So, we are not doing that. We’re just opening it up for trading.”

Spotify was the first big company to conduct a direct listing on Wall Street when its shares started trading last April.

The concern at that time was that direct listings were an untested way to go public. There was a concern direct listings do not have an initial price that is sold to investors, it was not clear where the stock would open. In a direct listing, most of the shares are immediately available for trading (in Spotify’s case, about 96%).

There was effectively no lockup period. The fear was that insiders would dump the stock en masse on the first day, leading to chaos.

Neither concern proved to be a major issue. Instead of an initial price that underwriters set to sell stock, Spotify and its advisors set a “reference price” of $132 that was roughly based on recent private trades. Spotify opened at $165.90 and closed at $149 on its first day of trading, up about 12%.

Fast forward to Slack, and those anxieties are much less evident.

Slack Secondary Market

About Slack

Slack was founded by the creators of Flickr and has over 600,000 organizations around the world that use it. It is estimated tht it's 10 million users collectively spend 50 million hours on it in a typical week. Slack has a very high growth with recurring revenues, however there are many concerns also.

The Risks

  • At $26 (reference rate) it is trading at roughly 34 times trailing revenues
  • The company loses money Very low barrier to entry. (Much Like $UBER and $LYFT)
  • Growth is decelerating, 2Q and FY20 revenue and billings guidance suggests a meaningful deceleration from current levels.
  • First quarter revenue growth fell to 67% year over year from 82% in 2018.
  • Stock overhang, on opening price around $9 billion in stock could theoretically be available to trade. Even in a bull IPO market that is a lot to absorb, especially in illiquid times such as after earnings.
  • The other big Direct Listing Spotify is trading at $146, below the $149 price it closed at on its first day of trading in April 2018.

The Positives

  • Paid customers grew 42% in the same year, and it grew another 42% in the most recent quarter
  • $WORK grew its client base of businesses that bring in more than $100,000 of annual revenue by 93%
  • Slack has over 10 million daily active users and serves about 600,000 entities that have at least three users.
  • Only about 95,000 of those organizations are using the paid product, but that includes about 60 of the Fortune 100 
  • Slack is restricting sales for those who bought private shares less than a year ago, and anyone who is an  officer, director, or significant holder of the company.

The Major Shareholders

The six largest shareholders are Accel, Andreessen Horowitz, Social Capital, CEO Stewart Butterfield, SoftBank, and co-founder Cal Henderson. They control about 60% of the stock. Some are restricted.

IPO Mania in 2019

People question why a direct listing with the IPO environment in a manic mood in 2019. Investors have been playing momentum without fear or favor it seems in the theoy of they only go up.

Recent IPOs (from initial price)

  • Beyond Meat up 580%
  • Zoom up 177%
  • CrowdStrike up 125%
  • PagerDuty up 127%
  • Chewy up 70%
  • Tradeweb up 56%
  • Pinterest up 52%
  • Uber (down 3%),
  • Lyft (down 11%),

The two ride sharing companies obviously the odd ones out. This has much to do with the initial IPO price and both companies face a tough time becoming profitable in the future. This is of course is true for many Unicorns.

About Slack

Slack was founded by the creators of Flickr and has over 600,000 organizations around the world that use it. It is estimated tht it's 10 million users collectively spend 50 million hours on it in a typical week. Slack has a very high growth with recurring revenues, however there are many concerns also.

The Risks

  • At $26 (reference rate) it is trading at roughly 34 times trailing revenues
  • The company loses money Very low barrier to entry. (Much Like $UBER and $LYFT)
  • Growth is decelerating, 2Q and FY20 revenue and billings guidance suggests a meaningful deceleration from current levels.
  • First quarter revenue growth fell to 67% year over year from 78%.
  • Stock overhang, on opening price around $9 billion in stock could theoretically be available to trade. Even in a bull IPO market that is a lot to absorb, especially in illiquid times such as after earnings.
  • The other big Direct Listing Spotify is trading at $146, below the $149 price it closed at on its first day of trading in April 2018.

From the TradersCommunity Research Desk

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