SELL Alert: our work here is done
26th November 2020 |
I’ll be honest with you, for the last few weeks I’ve been weighing up whether or not to sell Slack Technologies (NYSE:WORK) from the portfolio.
The reason is that the company is losing the battle against Microsoft.
I’ll be the first to admit, I actually like Slack. I use Slack, I was an early proponent of it, well before it ever went public.
Slack had a great advantage in gathering up a big slice of the workflow and business management market, but it’s somewhat stalled over the last year.
Meanwhile, Microsoft with its Teams competitor has been going from strength to strength. Mid 2019 Microsoft announced it had over 13 million daily active users. It took Microsoft just three years to hit that figure.
Slack took six years to get to 10 million daily active users.
Then in March this year Slack announced it had surpassed 12 million daily active users. That’s some fast growth.
Meanwhile, Microsoft with Teams also announced in March it had surpassed 44 million daily active users. Then in October it followed this up announcing 115 million daily active users.
Ouch.
In short, Microsoft is streaking ahead.
I also use Teams, I actually don’t find it as good as Slack. Maybe that’s a personal preference, but Slack has a far better user interface and it interacts with hundreds more third parties than Teams.
But you can’t deny the numbers – more and more are flocking to Teams than are flocking to Slack. This underperformance relative to its biggest competitor has seen Slack’s stock price take a fair hit from its IPO price of $38.50 back in June last year.
Our entry to Slack came earlier this year as Slack was still trading well down from its IPO price. The target was that within 12 months the stock could trade to $40. Longer term, even higher again.
Well, fortunately for us the rumours began to spread yesterday that Slack was in the sights of Salesforce.com.
The suggestion is that with Slack at somewhat of a discount right now, Salesforce is looking to swoop in, gobble it up and integrate it with its cloud services.
This bumped Slack’s price up 37.59% yesterday on these rumours to trade at $40.70. That puts us in a profit position of 76.5% on the stock.
Talk is that a deal could be announced as early as next week.
The tricky thing now is do you wait for a deal announcement, or exit now at these prices? After all, this is the highest Slack has traded since the day of its IPO (it traded up to $42 on the day of the IPO).
Here’s the situation.
If we don’t sell, then we’re waiting for a deal that’s not certain to come and at a price that we don’t know yet what will be. It could be lower than $40, it could be higher. We simply don’t know at this point.
I would be very surprised to see an offer come in higher than $40 considering that Slack hasn’t been at this price since its first day of trading. And at its current price of $40.70 it’s carrying a market cap of $23 billion – about one tenth the market cap of Salesforce.com and its biggest acquisition ever.
Hence if we do sell, then we’re taking profits and we’ve reached the 12-month price target, but we may be missing out on an extra bit of premium should Salesforce.com come in with an offer higher than $40.
Also, if an offer is tabled and gets approval, then there’s the process of the deal actually taking place, what it might consist of, maybe stock and cash, maybe stock, maybe all cash – without an official deal, we simply don’t know.
My take is that we exit the position here, and save any uncertainty about the potential deal that might (or might not) land from Salesforce.com.
Even if there’s an offer that’s higher, it’s unlikely to be radically higher than $40.70 on a market cap of $23.22 billion. There’s a chance it could even be a lower price. Slack’s 50-day moving average price is $28.62. An offer at $40.70 would equate to a 42% premium on that which is a lot.
If we also look at Salesforce.com’s last two acquisitions, MuleSoft and Tableau, they paid 21.2-times trailing 12 months’ revenue (TTM) for MuleSoft and 11.2-times TTM for Tableau.
To 31 July 2020, Slack’s TTM is $768.14 million. If Saleforce.com buys them with an enterprise value around $23 billion, that implies an EV/TTM multiple up around 30-times.
That would make it significantly more than any previous Salesforce.com acquisition and one of the biggest premiums for a software acquisition in recent years.
With that information, my take is that we should close out the Slack position with this boost from the rumour – it gives us a chance to exit Slack, which I was weighing up anyway.
As good as Slack is, Teams is smashing it. What this deal rumour has done is give us the perfect exit point with a quick-fire 76% gain in nine months. Which really is a great result.
Action to take: SELL Slack Technologies (NYSE:WORK) at $40.70 when the market opens on Friday (US time).
Note: due to Thanksgiving in the US the market will be closed today, and it’s operating on shortened hours on Friday. But you can still get your orders in before the markets open, just likely you’ll need to place limit orders.
Regards,
Sam Volkering
Editor, Frontier Tech Investor
