In this blog post, I will share my thoughts about a very popular cloud-based team collaboration company called “Slack Technologies”.
Product Market fit
Product Market fit is the degree to which a product satisfies a strong market demand. As modern work is complex and interdependent when compared to the previous decade, it is pivotal to have employees aligned across a common set of goals. An environment where information is seamlessly exchanged between the employees of the company will keep them engaged, motivated and aligned to their team’s objectives which in turn cascades to align with company objectives. Slack is right at the center of “information exchange platform” where employees connect to get their work done. In the current environment, where we use many different types of applications working with employees spanning across the globe and also working from remote, it is very important to have constant flow of information and keeping everyone on the same page. Slack addresses this problem space effectively.
Great product
Let me start off by quoting Slack CEO, Stewart Butterfield during Q2 Fiscal year 2020 earnings call:
[Stewart>>]
““This is an entirely new category of software enabling a once-in-a-generation shift in the way people work together. We believe channel-based collaboration is so superior to email-based communication for work, that this shift is inevitable,” said Stewart Butterfield, Chief Executive Officer and Co-Founder at Slack. “Customers are choosing Slack because we offer a great user experience, a rich application platform and ecosystem, and a growing network for inter-company collaboration via shared channels.”
I am not sure whether Slack is a brand new category of software. If I look back in time, I have used Skype at work in my previous job and it had group channels where we collaborated with folks working in Chennai, India and San Jose, USA. But I can confidently attest that Slack provides a much better product compared to all the chat apps that I have used at work. An application that always works with a great user experience and more often than not, Slack is the app which I use after I get up from bed and also before I go to sleep just to make sure that there are no loose ends. We use Slack in office every day to get work done. If you search for Slack, the first result that aptly shows up in Google is below:
Superior user engagement
To again quote Slack CEO, during Q2 earnings call:
[Stewart>>]
Slack was built with a relentless focus on our customer’s needs and the quality of the product experience. Users at our paid customers spend more than nine hours a day connected to Slack and 90 minutes actively using the platform on a typical workday. Think about that; 90 minutes every day and that’s not just a core part of the work day, it’s a core part of the whole day.
Paid customers are using slack everyday actively for 90 minutes is a big deal. The beauty of Slack is, it is one of those products in our company that is used by Engineers, HR, Finance etc., and it truly cuts across the entire organization. Like “Aspect Oriented Programming”, Slack is truly a cross cutting concern product across the organization. I took the picture below from the Investor Day Video.
Application Ecosystem
Slack has a thriving application ecosystem with more than 1800 app integration. People can seamlessly use all the other applications by staying within slack. I use zoom app within slack all the time. It is just a breeze. I just do “/zoom” and launch a zoom meeting. I use outlook app within slack and it automatically reminds me of any upcoming meetings, sets my slack status to “In Meeting” when a meeting is happening etc., All these niceties removes a little bit of friction. But if we add those small benefits over time, it truly compounds. In a way, by using these apps through slack, people start using slack even more when they need these tools, which is very powerful and it creates a snowball effect for the product. It’s no wonder we say, “Hey, can you please slack me the information” like the same way we say, “Can you please google it”. Slack has become a verb.
Shared Channels
Shared channels became available for public for all paid customers recently. It was in beta for almost 2 years. Shared channels lets you chat between employees of company A to another employee of company B. It truly will be a game changer, since any company would want to interact with other companies, be it vendors, partners, legal etc., The traditional way of interacting with them via email take eons to come to a proper agreement as opposed to communicating via messaging through shared channels which makes the communication happen instantaneously. Shared channels can have a network effect, since more number of companies using Slack will increase the possibility of inter company collaboration happening between them.
Brand
Through my personal experience of using Slack and also talking to various colleagues we all really like using both the products, Slack and Zoom. Slack, in an unconventional way has a bottoms up adoption as opposed to pushing the product from top down. Few employees in the company use the product and because of their usefulness and fondness of the product will advocate to other teams and organizations within the company. Slack brand appeal is really good and company pays a good deal of attention when it comes to it. They adopted the color scheme of video game which made their UI stand distinctly against other chat applications which existed when they launched their product. If you look at their website it looks aesthetically pleasing to the eye. The company also has a great fan following on twitter after they opened their account 6 years back.
Diverse Customers
Customers using slack comes from a diverse set of industries. A very deep desire of every human is to collaborate with others. In that regard, it’s no surprise that Slack is adopted by a wide range of companies in different industries. Hubspot, BBC, trivago, The Sunday Times, DevaCurl to name a few. This is one of the primary reasons I feel, if Slack can become a household name like Facebook or Google for example, then it will have far reaching implications in its adoptions. Slack is already been used by 10+ million daily active users in more than 150 countries and they are adding Data Residency support so that company data can be stored in their origin country and thereby aiding their growth strategy across the globe.
Engineering
I recently read through some of their tech blogs on implementing dark mode, shared channels. It was a very decent write up and I really like the fact that they are eager to share their technical craftsmanship to the wider community.
The core Slack team members have been together for some time. Before starting Slack, they sold their company flickr to Yahoo. After flickr was acquired, their next venture was forming a computer game company called Glitch, which eventually they had to close and paved the way for launching Slack. Slack UI adopting a color scheme of video games is a natural progression. Slack CEO looks to be truly inspirational and passionate in what he is doing. Glassdoor ratings for Slack, the company and its CEO, looks very good.
Threat
Microsoft Teams is the biggest threat to Slack, since Office 365 is used across the globe. Off late, Microsoft have been bundling Teams along with Office 365. So, if a company is using Office 365 then they get Teams virtually for free. Teams works very well with all of Microsoft products and also they are bundling video conferencing capabilities along with it. Remember, Skype is also owned by Microsoft :-). Slack appeal is really strong when it comes to startups, but when it comes to big enterprises, that’s where they need to battle it out and win over Microsoft Teams, especially when these big enterprises are already using Office 365. This is where it might get difficult for Slack to convince the company to use their product. Slack has over 800 million in cash as of Q2 FY 2020, which they can use to grow for the next few years, but Microsoft has deep pockets of cash with myriads of products and offerings. Not to forget the fact, Microsoft recently became a trillion dollar company. Recently I read an article published by Okta where they compared between best of breed products like Slack and Zoom versus Product suites/bundles and mentioned favorable points towards best of breed products. Okta pulled these numbers through their “Okta Integration Network”. One advantage I can think which is in favor of Slack is, it becomes very difficult to do many things really well when compared to doing one thing well. Slack currently is involved in building only one product and they constantly work on making it better for the customers whereas for Microsoft, Teams is a needle in a haystack. If my hunch is right, Slack will create an email product (which works seamlessly with Outlook, Gmail and also maybe its own email service(that’s why I said it’s my hunch :-)) which will nicely fit into its product through its acquisition of Astro email company. Microsoft Teams can clone all the features of Slack, like how Facebook did for Snapchat and it can play a catch up game, but if Slack truly captures the mind share of people using the application, then it will be difficult to dislodge it. The only way Microsoft Teams can pose a potential threat for Slack will be to bundle it for free of cost so that when customers buy Office 365 they get Teams along with it and hope that customers will be swayed away from using Slack to Teams and eat into its growth margin. It is a threat for sure, but very hard to predict how much or deep it will impact Slack’s prospects. It should become a little bit more clear in the next couple of years how this battle pans out. Slack partners well with companies like Atlassian, Zoom, Dropbox and maybe as a mitigation strategy who knows, these companies can bundle their products together and compete with Office 365 and Google Suite. It is also a possibility that Slack get acquired by companies like Google as these products work very well with each other and collaboration space is primed for growth in the coming decade, so competition will naturally be very intense.
Valuation
All these high growth companies are valued based on P/S. Slack forecast fiscal 2020 revenue is in the range of $590 million to $600 million which gets a multiple of around 20 based on the current market capitalization of 12 billion dollars which is still high when compared to its peers even after the stock plummeted closer to 50% from its 52-week high of 42$. If I assume that Slack will grow at 50% in year 2021, 40% in year 2022 and then 30% for the next 2 years, and at 2024, if P/S holds at 20, then their market cap will grow to 42 billion. P/S will most likely come down as the growth starts trending in the downward direction. If P/S comes down to 12 in 2024, the market cap will grow to 25 billion. Please read the below table with extreme caution. Once you have an excel sheet, we can project any growth rates to make the table looks flashy :-).
There is absolutely no guarantee that the events will turn out as the below table predicts. Slack can exceeds, meets, not meets the below numbers since nobody can predict the future with certainty.
Net dollar retention rate was 136% in Q2 FY 2020 which says that customers are sticky and also paying more. Additionally the non GAAP gross margin was 87.7% which is very good compared to its cloud peers.
Disclaimer
I own shares of Slack Technologies as of Oct 1st 2019. I might sell shares of Slack Technologies any time in the future. This blog post is NOT a recommendation to buy, sell, or hold Slack Technologies. I wrote this blog post to organize my thoughts about Slack Technologies and shared it so that you might find it useful and probably learn something from my musings. Also to call out, my current profession is working for a software company.
References
https://www.vox.com/recode/2019/9/19/20874094/slack-startups-microsoft-kruze-etr-charts
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