In its public debut on Thursday, Slack (NYSE: WORK) closed at $38.62 on a trade volume of over 135 million shares, including after hours trades. This was nearly 49% higher than the $26 reference price advised by the NYSE late Wednesday, which only served as guidance based on the average of recent private stock sales and was not a legally binding starting price like in a traditional IPO. As a result, Slack was theoretically equivalent to a $15.7 billion valuation when factoring in restricted stock units. Slack held a $7.1 billion valuation with a $427 million Series H last August.
Founded in 2009, the San Francisco-based company had raised a cumulative $1.3 billion in venture funding leading up to its NYSE debut.
Direct listingSlack's decision to utilize a direct listing protocol is rarely seen with such large companies. Historically, the underwriter-free method has been used primarily by budget-conscious small businesses seeking to avoid the abundance of fees associated with traditional IPOs.
However, Spotify's debut last year challenged that precedent. The music streaming giant implied that large businesses are also worthy candidates for a direct listing by betting that the sheer investor demand and enthusiasm surrounding a speculative industry disruptor would keep its stock price from collapsing in the absence of an underwriter. While a company doesn't raise funds with a direct listing since no new shares are being sold, it avoids both a lock-up period for existing investors and the dilution that issuing new shares would have caused.
For comparison, the NYSE set Spotify's reference price at $132 per share for its debut on April 3, 2018. The stock traded well above $150 through August 2018, when it peaked in the $190s before beginning a steady decline, falling as low as $106 by late December. The music streaming service continues to struggle on the market, reporting a 1Q 2019 net loss of 0.79 euros (about $0.89) per share. Additionally, it reported slowing growth in monthly active users, going from 173 million in 1Q 2018 to 217 million in 1Q 2019, a YoY increase of 26% but one that was also below estimates. Spotify recorded a slightly better 32% YoY increase in paying subscribers.
While Slack and Spotify are entirely different companies, the latter's performance a year later serves as a reminder that the enormous growth and potential profits being priced into recent high-profile public listings could take years to show, if it ever does become realized.
Ballooning market capAs of its Thursday closing, Slack holds a market cap of around $25 billion when factoring in restricted stock units. This is a nearly 40% premium compared to Lyft's approximate $18 billion market cap and only about 11% shy of Zoom Video's $28 billion.
A key thing to note about Slack is that it is highly dependent on a small amount of big spenders. The company reported 645 customers paying over $100,000 apiece annually as of April 30, representing 43% of total company revenue over the preceding three months. This is a modest increase from the 575 figure reported as of January 31.
With Slack holding a market cap between that of Lyft and Zoom but still being unprofitable, Wall Street may be betting that the company's big subscribers could increase rapidly as its software spreads through large organizations. As seen with Beyond Meat's astronomical rise from a $25 debut price to around $165 on Thursday, speculation over viral growth has a powerful effect.
For example, Beyond Meat's performance can be greatly attributed to rumors and circumstantial evidence of the plant-based meat company striking deals that allow it to penetrate high-profile restaurant chains. This is paired with a viral phenomenon of both vegetarian and non-vegetarian consumers eager to try a product that claims to finally replicate the look, feel and taste of real meat. This lays the foundation for, hypothetically, almost every hamburger patty under a restaurant's roof to easily be replaced by a Beyond Meat patty—something Wall Street seems to be envisioning.
Slack could theoretically replicate Beyond Meat's viral prospects as it rapidly penetrates large organizations, considering Slack charges per user. As shown with Facebook, Twitter, YouTube and other businesses that grew quickly due to viral social growth, massive profits can be made in ways that, say, Lyft cannot realize, as its growth remains bound by the cumbersome processes and large physical footprint inherent to operating motor vehicles. For example, traffic jams can hinder Lyft's revenue growth and customer acquisition, whereas Slack's viral spread is not subject to such constraints.
Investor windfallsThe direct listing aspect could be particularly handy for the company's earliest—and most profitable—investors, which, as mentioned above, are not subject to a lock-up period.
Accel, for example, held a massive 23.8% stake leading up to Slack's debut. This is nearly double that of runner-up Andreessen Horowitz, which held a 13.2% pre-IPO stake. Both firms began with participation in Slack's $1.5 million seed round in 2009 and continued over several subsequent investments.
With billions in profits, this is an outlandish return on investment for the two Silicon Valley firms, particularly Accel. At the stock's opening price on Thursday, its stake in Slack was worth about $4.6 billion.
Featured image of co-founder & CEO Stewart Butterfield (left) and co-founder & CTO Cal Henderson courtesy of Slack