Episode 6: Slack, Salesforce and the effect of the trade war on Germany

[00:00:03] On today's episode of Before and After, powered by Refinitiv, we are looking at two companies that are disrupting the status quo and helping to usher in the modern workflow model. They are forefront in the blending of the tech, business and gig economy. Intrinsic value doesn't always lead to monetary gain though and we want to look at events and announcements that can signpost possibilities for asset price movements and give our position an advantage around them. So in this episode, we will look at upcoming announcements from Salesforce and Slack. Then its a look into the US retail till to see if Black Friday earned its name and turned the corner on the suspect economic indicators. Salesforce's cloud based enterprise software accounts for the majority of their revenue and has become a central part of most major I.T. department budgets. Earnings have averaged over 20 percent gains each quarter since 2017, and that makes the upcoming third quarter announcement crucial. Salesforce generates one third of its revenue internationally and this announcement will give us a glimpse of how, if at all, the economic slowdown has affected global I.T. spending. In theory, Salesforce should be less vulnerable to macro shocks as their first mover advantage in cloud customer relationship management (CRM) has seen Salesforce's market share at six times their closest rivals; Oracle, Adobe and Microsoft. But there lies the risk...theory does not always translate to practice. Fear of an economic slowdown is often a huge impediment to revenue generation and salesforce's 25 percent growth from Q1 and Q2 sales may not be repeated, leaving their goal to double revenue by 2023 in possible danger. But for now, Salesforce's momentum as a company and in the sector is still firmly on the upside. Microsoft, one of their competitors, has had a torrid 2019 and is still up 49% year to date. This actually bodes well for Salesforce going into year end as the sector will be afforded a steady bid and no one will want to book the profit this year for tax purposes. There aren't really any expectations for margins to improve, so all eyes will be on revenues which are expected to come in at 4.45 billion US dollars, a growth of 31 percent year on year. A beat would lead to a test of the $172.90 level on the upside. Downside support on a miss is the $155 level, which was a top for most of the summer months. A breach of that support level would see Salesforce retesting the October lows of $141.49. But again, the risk is still skewed to the upside, given the market momentum and time of year. Slack is a company that has so disrupted the collaborative application software market that to Slack someone is corporate lingo's version of texting someone. Slack's core service offering is a communication platform that provides real time messaging, file sharing and archiving. Like Salesforce, Slack trades at a premium over competitors. But much of the euphoria of Slack's June direct listening has faded away into the close of 2019. As is the case with many venture unicorns, the public market is not a place where companies go to raise money. The spectacle, an opportunity to fetch an even higher valuation and giving early investors an exit are the true motives. So when slack directly listed, which means the company took no proceeds from the stock going public, they were seen again as disruptive. And in the beginning it worked. Or Refinitiv chart shows that day one trading on the New York Stock Exchange saw slacks, a stock symbol work rise from its reference price of 26 to 38.62. But here's the rub, Slack's dual class share structure meant that super voting class B shares must be converted to class A common shares before they can be sold. First day trading volume for work was 140 million shares. One hundred and ninety four million were converted. And so now we're here less than six months since the direct listening and the stock is lower than its reference price, trading in the low 20s. Like their unicorn brothers, Uber and Lyft, Slack is a cash burner,though,Slack's prospects of profitability are much more realistic. At an 18 times sales multiple compared to their comps, who on average trade at two times, where the company should fundamentally be priced is anyone's guess. Slack has a 12 billion market cap for a sector that currently totals 18 billion and they have much more robust competition from Microsoft than does Salesforce. With that in mind, for trading purposes, we can look at these scenarios. Slack at current levels is about 12 percent below their reference price of 26. Since there is no 180 day lockup looming, the reference price is of much less concern or importance. Slack's investors in the aftermarket, where it opened at 38.62, would already be down 40%. So then we should focus on where the investors in the private markets price level is to understand where the stock could go. In Slack's last financing round in August 2018, the company sold shares at $11.91 for a valuation of $7.1 billion. It's not unreasonable for Slack to trade at 10 times sales and revisit their private market valuation, which is alarmingly still 50 percent of potential downside for current shareholders. Any slip up in top line growth will send this already wounded animal spiraling. The caveat is that the stock, as we stated, is already very oversold, down 40 percent in under six months since it started trading. A beat on the top line revenue estimate of 156 million for the quarter and an increase of forward guidance could see a double digit pop. Here we're thinking about the 26 level of the reference price, which would set the stock at the upper end of the expected results day range. As expected, the shift from brick and mortar shopping to online retail has occurred. Black Friday cyber sales set a record, as did Thanksgiving Day online purchases. The 7.4 billion in online sales on Black Friday marks 19.6% growth year over year. A couple of things to note as well about the cyber purchase sales numbers. There was a record breaking one hundred sixty eight dollars average order. And secondly, 65 percent of purchases were made on a mobile device. Record setting numbers for sure. And yet after opening slightly higher, futures faded and the NASDAQ quickly sank to down 1 percent on the day, led on the downside by, you guessed it, Amazon.  With a solid jump in cyber shopping and robust total sales, this type of negative price action is not a good omen, especially given the previously mentioned strong Thanksgiving trading periods where from 2007 to 2017, a grouping of S&P 500 retail stocks posted a 5 percent return compared to the average 3 percent return for the S&P 500 overall. We need to follow Amazon and retail in particular over the coming weeks because we know the overall markets will be following suit. This has been before and after powered by Refinitiv. I'm your host, Jamie Macdonald. Please be sure to like subscribe and share with your friends. Hit the bell to be notified of new episodes and we will be back on Friday.