Paid to Slack off!

Scott Williams

Fiftyone Capital

Within a month of Salesforce taking a position in Slack Technologies, it acquired it last week for $27bn. To put into context, this is bigger than many household name technology M&A deals.

Linkedin $26bn - Microsoft
WhatsApp $19bn - Facebook
Skype $8bn - Microsoft
YouTube $2bn - Google
Instagram $1bn - Facebook

You would be forgiven to think that this megadeal means blockbuster profits for shareholders, but this is not the case for many. Slack eschewed the traditional IPO route when it went for a direct listing in June 2019. The stock opened at $38.50 and has drifted lower ever since until Salesforce came along with a bid valued at $45.

The saas model ranks as one of the best business models in the world with predictable recurring revenues, high switching costs, ability to scale rapidly and fat profit margin potential. The problem as an investor is that many of the best saas stocks trade at nosebleed levels, making the risk/reward opportunity unattractive. In a year where many saas stocks have seen incredible share price appreciation, Slack is a notable laggard. A combination of misunderstood growth expectations, perception of the business as just a chat program, investor fatigue and concern over Microsoft crushing Slack with Teams, dampened enthusiasm for the stock. While the market fled the stock, we saw an opportunity to buy a founder-led business building a platform that represented the future of enterprise collaboration but priced at a substantial discount to its peers.

To address the elephant in the room, we had to get comfortable that Slack could coexist and thrive in a world where Teams is bundled free with Microsoft Office. In its most recent results, Slack has continued to execute well, posting 30% growth in customers, 125% net dollar retention rate, high return on customer acquisition costs and expanding margins; this is not indicative of a business being crushed by competition. While Teams has gained mass adoption thanks to its massive existing installed base of Microsoft Office, Slack is no slouch either with +130k paying customers including Amazon, Shopify, Atlassian and the majority of the Fortune 100. Slack is particularly prominent amongst the developer community and companies that prefer an open platform rather than being tied to one ecosystem such as Microsoft. Another way to look at the question of competition is to ask, how many other businesses have only one competitor? To only have one notable competitor in a global context (even if it is Microsoft), is very rare indeed.

While we are pleased to generate a great return in such a short holding period, we cannot help but wonder what heights Slack shares could have achieved over the longer term if it were to remain a stand-alone company. 

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Scott Williams
Portfolio Manager
Fiftyone Capital

Scott is the Executive Chairman at Fiftyone Capital. As the previous CEO, Scott founded the company to manage not only his own wealth, but the wealth of other investors and families looking for a safe harbour for their capital.

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