In light of recent market events many have gravitated towards some obvious plays such as buying cruise line and airline stocks (some of which have fallen 30%-50%+ from their highs in February).
Personally, I stay away from cruise line stocks in general because I believe a non-trivial amount of their revenue comes from gambling and alcohol sales aboard their ships.
As for airline stocks, I’ve never bought a single share in an airline for the simple fact that I hate the experience of flying on commercial airlines.
Pretty much every time I get off a plane my immediate reaction is: “wow that sucked.”
For me, the stress of owning a company whose product or service sucks in my opinion makes it not worth it.
In light of the Corona Virus shutdown, an investment opportunity that I think is becoming quite clear relates to companies that make it easier to work remotely.
What Am I Investing In?
Side Note: If you live in the United States and you need halal funding that is an investment in you and repayment is based on your income and doesn’t involve a loan of money then go to fundmebff.com to learn more and apply for funding.
If you’re an investor and you earn more than 200K annually and would like to diversify your holdings with something other than stocks, perhaps something less volatile, then go to fundmebff.com and apply to become an investor.
The company I would like to talk to you today about is Slack Technologies.
Ticker symbol: WORK
Slack makes a platform for desk worker collaboration. It launched its flagship product in August of 2013.
The name “Slack” is an acronym for “Searchable Log of All Conversation and Knowledge”
Now as I always say, the first step to analyzing any investment opportunity is to understand the product and the business.
Here is Slack’s founder and CEO Stewart Butterfield, who by law must refer to his fingers as butterfingers, explaining Slack’s product:
So basically Slack is a more efficient, more effective communication tool than email.
Rather than having your employees or group members with very narrow views of what is going on around them through their email inbox, with Slack they can gain greater visibility into all relevant information related to a particular topic.
As an added perk, Slack offers Integrations with tools like Google Drive, Dropbox and Twitter which also sets them apart from other messaging tools.
You can also have audio or video calls using Slack.
I’ve used Slack’s product, I currently use their product and it’s simply a superior way of communicating with coworkers/group members than email is.
I am confident that overtime, every organization and company will either have Slack or a Slack-like service they rely upon for their in house communications.
How Slack makes money?
Slack primarily makes money through a Freemium subscription model.
You can start out with slack for free with limited features. If you have a smaller organization this free plan is perfectly sufficient. It also serves Slack to get people used to and hooked to their product while on the free plan so that when the organization grows and they need some of Slack’s more advanced features, the customer is strongly inclined to stick with Slack because they know the product and how to use it.
I love subscription businesses because they offer recurring revenue from the same customer thereby increasing the lifetime value of each customer the company is able to attract.
I also love the Software as a Service model because of its fantastic margins. Slack reported a 86.6% gross margin in its most recent filing.
Slack’s Financial Highlights
- Have yet to post a profit.
- $800 Million in Cash.
- GAAP operating loss was $91.2 million in 2019.
- $0 Debt.
- Gross margins of 86.6%
- Total revenue for 2019 was $630.4 million, an increase of 57% year-over-year.
Slack finished 2019 with 110,000 paid customers. Of them, 893 customers spend more than $100,000 annually while 70 customers spent more than $1 million on slack annually.
Given the company’s high gross profit margin and gigantic revenue growth, I predict they’ll post their first profit in the next two to three years max.
The core team at Slack is the team that founded Flickr which is an image hosting/video hosting service so they have experience scaling a company rapidly and taking a new product to market.
Their primary competition is Microsoft.
In my view, Microsoft has been the Me Too company ever since Bill Gates stepped down as CEO in January 2000.
Close to zero innovation has come from Microsoft since that time as they’ve just been making incremental improvements to their biggest hits such as their operating system and Microsoft office while the rest of their time is spent copying the successful products of other companies.
Apple comes out with the iPod, Microsoft comes out with its own less good me too product called Zune.
Amazon comes out with AWS, Microsoft comes out with a me too product called Azure that is less good.
Apple makes smartphones, Microsoft comes out with their me too Microsoft phones that are less good.
Google has a search engine, Microsoft has something that forces itself onto you when you are really looking for Google called Bing.
Similarly, in the collaboration space, after Slack launched in 2013, Microsoft came out with their less good me too product called Teams in 2016.
As far as I can tell, Microsoft Teams is the Bing of collaboration tools. It’s just a less intuitive, less cool version of Slack. They try to copy Slack in everything they do with the only distinct feature of Microsoft Teams being integrating better with other Microsoft products like Sharepoint. Who the heck wants to use Sharepoint anyway??
So I’m going with Slack on this one all day.
Napkin Math Valuation:
In 2019 Slack estimated its total addressable market to be $28 billion. Other analysts on Wall Street have put the Total addressable market at around $40 billion.
Revenue for the current ($630 Million) would suggest, assuming a $30 billion market size, Slack has captured about 2.1% of the potential market so far.
Given that they are as far as I can tell the best-of-breed in their category offering a service that I think most all corporate environments are moving towards, do I think they can serve 15%-20% of the total addressable market in the next 5 years? Sure I do.
If they maintain the growth they’ve experienced over recent years they should be able to reach a 15% share comfortably.
If slack captures 15% of Total Addressable market in the next 5 years (~$5 billion revenue) and has a 10 times revenue multiple (same as Salesforce as of writing this article) you’re looking at a $50 billion dollar company. Today it’s trading at ~$15 billion which means if it reaches $50 billion you will have 3.33X your money or a ~35% annual return for the next 5 years.
I typically aim for a 30% return annually on my money so 35% would be a buy for me.
Slack Halalness Score
I find nothing inherently objectionable about Slack’s product or business model and as an added bonus it has $0 in interest-bearing debt.
Accordingly I’m going to give it a 9/10 Halalness score. (I kept a point off to leave some room in case something in that company isn’t %100 Zabiha.)
Disclaimer: This is not investment advice. Make sure you do your own due diligence before making any investment decisions. The information in this article is for informational and educational purposes only.