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Slack readies for debut amid bullish expectations despite volatile markets

Enterprise messaging company Slack Technologies Inc. is poised to begin trading this month, and IPO experts say its U.S. listing could land on the winning side of a market generally favorable for new entrants despite recent volatility.

Slack is expected to launch in the public markets above its $7.1 billion valuation from August 2018, when it raised $427.0 million in series H funding. In private market transactions, Slack shares have sold as high as $27.25 as of April, implying the potential for a market cap of almost $17 billion, said Kathleen Smith, principal of pre-IPO research at Renaissance Capital.

Slack's planned direct listing follows a similar market debut by Spotify Technology SA in 2018. Such a listing allows a company's stockholders to sell shares directly on an exchange without underwriters' assistance. Spotify's listing was generally considered a success and priced above expectations, but other companies have continued to prefer underwritten IPOs when begin public trading, in a bid to help them mitigate the risks of volatile early trading.

While the biggest U.S. IPOs thus far this year have seen mixed results, Renaissance Capital's IPO Index, for instance, is up about 30% for the year to May 31. The exchange-traded fund tracks recent market entrants Uber Technologies Inc., Lyft Inc. and Pinterest Inc., three Silicon Valley companies that have had IPOs in recent months, with differing investor reactions. Uber and Lyft have underperformed, with shares falling 10.2% and 20%, respectively, since their initial offerings. By contrast, Pinterest's stock has gained 31.2% since its April IPO.

IPO experts say the market has been favorable to smaller offerings.

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Slack, which provides a communications platform for enterprise users, should benefit from investor interest in the enterprise technology market, as well as optimism about its growth prospects and profitability, experts said.

"There is strong interest in these enterprise software companies," said Renaissance Capital's Smith, pointing to video conferencing company ZOOM Technologies Inc. Zoom, which is smaller than Slack, made its public launch as a penny stock in March and has seen its shares rise ever since, closing May 31 at $1.80 per share.

Richard Truesdell, an IPO attorney and co-head of Davis Polk's global capital markets group, agreed. Uber and Lyft were unique cases as the first ride-sharing companies to go public, but Slack is expected to benefit from a wave of investor interest in the enterprise software market, he said in an interview. The sector is attracting an influx of customers with new workplace communication tools and software, driving growth.

Slack, which began as an internal communications tool before seeking paying external customers in 2014, reported 49% year-over-year growth in fiscal 2019 of paid subscription plans as of Jan. 31, to 88,000 organizations. Slack said in a regulatory filing that it considers Microsoft Corp. to be its primary competitor, though its communications tools also compete with products from Alphabet Inc.'s Google, Cisco Systems Inc. and Facebook Inc.

Slack reported a net loss of $138.9 million for its fiscal year ended Jan. 31. Smith said she expects the company to hit positive cash flow from operations in 2020.

Davis Polk's Truesdell, who expects a high volume of IPOs and near-term follow-on offerings in 2019, said the IPO market creates a way for companies to prepare for any disruption in the capital markets that might come later given concerns about a potential broad correction in the future.

"Investors can't stand on the sidelines waiting for this correction that never seems to come," Truesdell said.

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