Mizuho Appreciates Slack's Platform, But Competitive Sidelines Are Too Big To Ignore

Slack Technologies Inc WORK boasts a best-in-class product, but the competitive environment will likely limit Slack's pricing power and expansion opportunities, according to Mizuho.

The Analyst

Mizuho Securities analyst Gregg Moskowitz initiated coverage of Slack with a Neutral rating and $26 price target.

The Thesis

Slack's platform could completely replace instant messaging solutions and in may cases e-mail usage, Moskowitz wrote in a note. The company's roots trace back to a failed video game platform but evolved to redefine how businesses communicate from a "straightforward text-based collaboration" system to a "far-reaching productivity" hub.

Slack does face competition, but Moskowitz said smaller vendors have failed to offer a superior product in terms of sophistication, support and user-friendliness. Tech titan Microsoft Corporation MSFT sells a rival platform called Teams, however, which is a "good enough" alternative for Slack customers looking to compare products.

In fact, the analyst said Microsoft offers a compelling free version of Teams and a free premium platform for paying Office 365 business customers. This alone is sufficient enough to weaken Slack's pricing power and will make it difficult to win enterprise clients.

For any new feature Slack implements that could revolutionize the space even more, it's "virtually guaranteed" Microsoft will counter with a substantial investment in its Teams.

Finally, Slack's stock is trading at 17 times 2020 EV/Sales which represents a 100% premium to the SaaS peer group. Any valuation expansion would be justified only after the company shows "excellent execution."

Price Action

Slack's stock traded around $25.44 at time of publication.

Related Links:

Analysts Still Bullish On Slack Despite Earnings Sell-Off

Option Traders Make Massive Bets On Microsoft Rebound