Why Slack's a victim of 'high expectations,' but is still a good bet

Nick Robertson
Senior Producer

Despite beating expectations in its first quarter as a public company, Slack (WORK) is coming up short for some investors.

The company’s stock has swooned since the release of its second quarter report, and is down over 26% from the highs it hit after its June debut. On Wednesday, Slack’s losses quickened after it warned that its losses will widen in the upcoming third quarter — on top of slowing sales growth and higher expenses.

“Sometimes you can do really well but it’s not good enough to placate the people who are invested in you,” Rishi Jaluria, D.A. Davidson’s senior vice president & senior research analyst, told Yahoo Finance’s YFi PM.

“This is a little bit of the pitfalls of having high expectations,” Jaluria argued.

While Slack is trading above its IPO price of $26 per share, it’s still significantly below June’s spike high of $38.50. On Friday, the stock shed an additional 6% to trade above $28.

“It’s very evident in my sector of enterprise software that a lot of these names are very, very expensive because they’re growing so fast and have the potential to become very, very profitable,” he added.

Jaluria, who currently holds a neutral rating on Slack’s stock, is taking the company’s third quarter guidance with a grain of salt.

The same goes for other analysts like Citigroup — which also rates Slack at neutral with a US$39.00 price target — given that most of 2019’s class of tech “unicorns” that have floated initial public offerings (IPOs) have had a rocky time as public companies.

“All these newly minted IPOs to the public market put their guidance bar very, very low so they can get into a comfortable beat and raise cadence,” according to Jaluria.

“We see that with Slack. The fact is, Slack beat their second quarter guidance in spite of [an] $8 million headwind,” he said.

“That tells you they definitely got conservative,” Jaluria added, referring to the company paying out customer credits due to temporary system outages that occurred in June and July.

‘Absolutely immense’

The logo of the Slack Technologies Inc. is seen outside the New York Stock Exchange (NYSE) after their company public offering (IPO) on June 20, 2019 located at Wall Street in New York City. (Photo by Johannes EISELE / AFP) (Photo credit should read JOHANNES EISELE/AFP/Getty Images)

Jaluria pointed to Slack’s embrace by an ever-growing variety of businesses as an optimistic sign for its future.

“The market opportunity is absolutely immense,” he said. “This is a really loved product within tech companies and tech-forward companies. And we’re starting to see early signs of more traditional, slow-moving industries like financial services.”

To be certain, Slack’s numbers weren’t bad. In its second quarter report, the company said the number of customers bringing it more than $100,000 in annual recurring revenue jumped by 75% year-over-year.

With growth that aggressive, Jaluria views Slack’s cash-burn rate as an essential aspect of building its customer base and marketshare.

The company’s “burning cash — but they’re doing so in a responsible manner,” he said. “They’re fishing on their sails. They’ve got a marketing model, they have really high gross margins. They’ve got this long runway of growth.”

Jaluria added: “I wouldn’t want them to underinvest when the opportunity is so vast and so huge. It’s absolutely there for them to seize. It’s really just execution.”

Nick Robertson is a senior producer at Yahoo Finance.

READ MORE:

Follow Yahoo Finance on Twitter, Facebook, Instagram,Flipboard,SmartNews,LinkedIn, YouTube, and reddit.