As Slack’s Stock Slips Sideways, A Reminder Of Its Still-Rich Valuation

Morning Markets: As Slack continues to slide as a public company, a look at why it’s still valued so highly amongst its SaaS peers.

Slack’s valuation declines since its direct listing are news. The firm, which traded as high as $42 after floating this Summer is worth just $23.54 today, a sharply lower figure.

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We’ve written about why Slack has seen its valuation come down from early highs, noting that Microsoft remains an active competitor, the company’s revenue growth is slowing, and more. Today, however, let’s make the opposite point. Why is Slack worth so much, compared to other SaaS companies?

Multiples

Slack is worth about 25.2 times its trailing revenue, according to YCharts data. The average value of a SaaS or cloud company today, on the public markets, is about 10 times its revenue. (Note that the latter figure represents a basket of SaaS and cloud companies, and is calculated using enterprise value instead of market cap. The 25.2x figure and the 10x result are therefore slightly different; however, as they are so far apart, they are sufficient for directional comparison.)

From those two results, we can see that Slack is, compared to its public peers, richly valued. Why that is the case is our next question. The good news is that we have new data that helps us better understand what is normal for SaaS companies.

Let’s connect some dots. Slack is worth about $25 for every dollar of revenue it brought in over the last four quarters. Other SaaS companies are worth around $10 for the same revenue dollar. Both metrics are rich valuations; some SaaS companies trade at far lower metrics as does nearly every other market segment.

To understand, then, why Slack is worth more than other public SaaS companies it would help if we had some numbers on what an “average” SaaS company looks like. With that, we could look at the gap from an average, or median result to Slack’s own, which should illustrate the company’s valuation and what supports it.

All we need is a dataset. Happily, KeyBanc’s 2019 SaaS report recently dropped and we’ve been reading it. Expect more from us on the data presented, but here are some data points about a few hundred private SaaS companies:

• Median growth (discounting M&A) of 40 percent in 2018, falling to 35 percent for companies with greater than $25 million in annual recurring revenue (ARR).
• Average ARR growth of 36.7 percent from upsells and expansions, expanding to 50 percent for companies with over $100 million in ARR. This works out to about 17.5 percent net retention, loosely.
• Median gross margins of 78.0 percent.

Now, let’s examine Slack’s comparative numbers:

• 58 percent year-over-year revenue growth to $145.0 million (implied ARR of $600 million, presuming little to now services revenue.)
• Net dollar retention of 136 percent.
• Non-GAAP gross margin of 87.1 percent.

Bear in mind that we’re dealing with rough-but-directional comparisons between the KeyBanc data, and Slack’s own results.

Even with that, Slack is growing faster than the average of the collection of private SaaS companies, especially the larger cohort (private companies tend to grow more quickly than public companies on a percentage basis, as they are smaller on average). At Slack’s scale that is quite impressive.

Slack’s net retention (how much more customers tend to spend each year with the firm) is also far better than our loosely-calculated comparative metric for larger private SaaS companies. And, Slack’s gross margins are very high when compared to the already-strong SaaS median figure set by the group of private companies.

And that’s why Slack is worth so much per dollar of revenue today, even if it is worth less than it was a few months ago.

To paraphrase ourselves: Slack is valuable just not quite as valuable as some folks thought it would be.

Illustration: Dom Guzman