On Sept. 8, Slack (NYSE:WORK) reported its second-quarter results. Despite beating on top- and bottom-line estimates, Slack stock declined in the post-earnings trading session following the results.
Shares shed 13.9% that day and the dip was surprising for several reasons. Not only did the company report a solid result, but Slack still has secular growth drivers in play. That’s as the novel coronavirus keeps traditional work spaces in disruption.
Beyond that, Slack stock had already declined in the days leading up to the report.
In the four trading sessions leading up to earnings, shares fell 14.5%. From peak to trough during that four-day stretch, shares slid 20%. For bulls, that likely seemed like a good enough risk/reward to get long Slack.
Collectively, Slack stock is down almost 27% from its highs earlier this month. At its post-earnings low, it was down 31%. To me, that’s a dip to buy, as key catalysts remain in place.
Looking at Slack’s Earnings
The company reported breakeven non-GAAP earnings, which was 3 cents ahead of consensus expectations. Revenue of $215.9 million beat expectations by roughly $6.7 million after growing close to 50% year-over-year.
So what was the problem? Billings.
Billings of $218.2 million came up short of estimates, which ranged anywhere from $226.3 million to $236 million.
Still, I think it’s a mistake to throw away all of the good things in the quarter because Slack’s billings total came up shy of expectations. That is worth a 14% overnight haircut, totaling billions in market cap?
I like that the company beat on earnings and revenue. I like that it provided slightly above-consensus guidance for full-year revenue and better-than-expected earnings guidance. I also like the customer additions during the quarter.
Slack reported 985 paid customers with $100,000 or more in recurring annual revenue. That’s up 37% year-over-year. The company also reported 87 new customers with recurring annual revenue in excess of $1 million, up 78% year-over-year.
In total, Slack reported 8,000 new customers, which was up 60% year-over-year.
CEO Stewart Butterfield expanded upon this in the press release:
“Paid Customer growth — which is the single most important driver of the business over the long term — accelerated in Q2, up 30% year-over-year … One of the drivers of this acceleration was Slack Connect … We ended the quarter with more than 380,000 connected endpoints, up more than 200% year-over-year, and now more than 52,000 Paid Customers use Connect, up 160% year-over-year.”
A Deeper Look at Slack Stock
It seems like Wall Street decided to focus on one metric — billings — and is basing the entirety of Slack stock on that. The company still has robust growth as it continues to swing its bottom line in the right direction while growing the top line.
Next year (in fiscal 2022), Slack will begin generating revenue in excess of $1 billion, while still sporting double-digit revenue growth.
Depending on how the pandemic works out, current growth estimates may even prove to be conservative. It’s a simple but realistic observation: The coronavirus is here to stay. At least here in the U.S. and at least through the rest of the year.
The country is still enduring tens of thousands of new daily cases, with the lowest reading this month coming in at 25,401. We’re averaging nearly 1,000 deaths per day. This is not an environment where teams that can work remote are rushing back into the offices.
For that reason, Slack should continue to see demand for its product. To be honest, even in-office workers can benefit from Slack — as pre-pandemic business clearly showed.
Bottom Line on Slack
As for the financials, we’re talking about a company with current assets that are more than triple current liabilities. Those figures stand at $1.7 billion vs. $518 million, respectively. While not fully cash flow positive, Slack is quickly working on making the swing.
Last quarter, Slack generated $10.7 million in free cash flow. That’s against $7.8 million in free cash outflow in the same period a year ago. The prior quarter was positive too, although in the trailing 12 months, free cash still stands at a $7.9 million outflow.
That’s not bad compared to two years ago. In fiscal 2019 the company had free cash outflow of $100.4 million, which was cut to $64.5 million in fiscal 2020. The push toward free cash flow positive makes Slack attractive for longer-term investors. That’s as growth projections remain solid and as the balance sheet is in healthy shape.
On the charts, the 61.8% retracement continues to act as support. If it continues to hold, look for a push back over the 200-day moving average. On a break lower, I’d love another chance at WORK stock at $20, which is long-term support.
While the charts are a bit choppy now, it could lead to a great period of accumulation for investors as this is a long-term winner.
On the date of publication, Bret Kenwell held a long position in WORK.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.