Reimagining the workplace is the sales pitch of enterprise communication platform providers Zoom, Slack, and Teams, but nobody expected a global health pandemic to turn their vision into reality.
Zoom shares have nearly quadrupled to $US260 in 2020. But its potential to reshape video-conferencing was no secret prior to COVID-19. After an April 2019 initial public offer priced at $US36 a share, Zoom raced to $US68 over 2019.
“It’s always been a very fast-growing SaaS [software-as-a-service] stock,” says Thomas Rice, the portfolio manager at Perpetual’s Global Innovation Fund.
“When it first listed it had SaaS metrics that were off the charts. Growth rates and margins were very high.”
Mr Rice, who counts Atlassian founders Mike Cannon-Brookes and Scott Farquhar as the two biggest investors in his fund, says the inherent virality of Zoom helped its user adoption rates thump the competition.
“Zoom is very easy to adopt, everyone knows what video conferencing is. So it’s a very easy sales and onboarding process. It had a monster [quarterly earnings] result. The best beat-and-raise I’ve seen in my career.
“They raised full-year revenue guidance to $US1.8 billion ($2.6 billion), which was double consensus, and full year EBIT guidance to $US367 million, which was triple consensus – this from a company that has historically guided conservatively and never missed a quarter.”
Rice’s problem with Zoom is valuation. Worth $US75 billion today it sells for 42 times forecast revenue and 204 times forecast EBIT.
“I think it’s a great management team, they’ve executed really well, all the security issues are kind of old news now. I think their response to that was world class in turning that around,” says Rice. “So I’m very excited about the future, it’s just I think there’s better opportunities for capital.”
The company was the Perpetual fund’s largest holding, until Rice sold out entirely over the past month.
According to the fundie, the key difference for investors between Zoom and workplace communications platform Slack is the sales model.
“Slack is more you’re selling to IT and it’s a new workflow for people. So it’s replacing workflows that might exist in email or other messenger products. That’s a tougher sell. I think they lose a lot of people that sign up, but don’t know how to use the product.
“It reminds me a little bit of Twitter. It’s always had this problem where people sign up for it, but don’t see why people like this. And they turn off. Slack has a similar problem, where they need to improve that conversion funnel.”
Twitter’s feeble investment returns since listing in 2015 are an unwanted roadmap for Slack, with both boasting viral user growth and scalable business modes.
Rice describes himself as “neutral” on Slack having owned it, but sold it on valuation grounds.
He says investors were disappointed in Slack’s March quarter result, despite it adding 90,000 new free or paid enterprise subscribers and growing quarterly revenue 50 per cent to $US201.7 million.
“It’s more of a multi-year process to sell Slack to a larger organisation because you’re changing a lot of their internal workflows. People didn’t realise that about the sales cycle. So you don’t get that immediate benefit to the same extent as Zoom.”
Critics of Slack and Zoom point to the competitive-elephant-in-the-room of Microsoft – alongside its Teams product and dominant market position via its Outlook email platform.
“Microsoft is a serious competitor for both Zoom and Slack,” says Rice. “For a lot of organisations it’s a default choice, if you’re already a Microsoft customer. But individually I think Zoom is a better product.
“For Slack a lot of people are focused on the competition with Microsoft, but email is the biggest competitor really.”
A potential advantage for Slack over Teams is its emoji culture that impresses chief people officers focused on employee engagement, as much as other C-suite members looking to save time or money.
“It’s definitely good for building culture,” says Rice. “I spoke to someone at Nike and asked him what’s the difference between Slack and Teams? He knows all about culture… and how at Nike there’s a Slack channel where people post baby pictures and they don’t do that on Teams, which is like a work tool.”
Rice isn’t a buyer of Slack shares today, but says it’s working on additional features like shared channels where it can be used to talk to another company across Slack.
“I think it’s too early to say how that goes. They’re hoping it provides some of the virality they don’t have. That’s the other big difference – Zoom is naturally a viral product, whereas Slack you use for your internal organisation, but that’s it.”
Despite the pandemic tailwinds, Slack shares sit just 32 per cent above their June 2019 initial public offer price of $US26 per share.
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