Slack went public, but through a direct listing, not an IPO

Trading Blog | 5 min read 

Slack went public, but through a direct listing, not an IPO

Workplace messaging service Slack became the latest hot technology company to sell its shares to the public on Thursday, soaring 50% higher than expected on its debut.

Written by Mitchell Roach
@mvtchh

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The San Francisco-based company’s shares started trading on the New York stock exchange at $38.50 – well above the $26 guide price – and closed at $38.62 valuing the company at over $24bn, making a billionaire of co-founder Stewart Butterfield and potentially ushering in a new era of stock market sales.

Slack sold its shares in a direct listing – eschewing the traditional initial public offering route. A direct listing dumps the costly underwriters, who do the preliminary sales work and establish an initial price, and the investor roadshow and instead takes the company’s shares directly to the market.

While the method saves on banking fees it can also lead to greater volatility in the share price. Only one other big company, the music streaming service Spotify, has gone public this way. That share sale is seen as a success and if Slack’s sale goes well too it will encourage others to follow suit.

Slack started life as a messaging app in a game created by Butterfield and others. When the game didn’t take off Butterfield spotted potential in the messaging app. Reborn as Slack the company attracted the attention of top-tier Silicon Valley investors raising $1.4bn from companies including Andreessen Horowitz, an early investor in Facebook, Twitter, Lyft and others.

Like most of its peers, Slack is losing money – it lost $138.9m last year and according to the company losses will “significantly increase” over the next few years. Revenues are growing fast up to $400m from $100m three years ago, but growth is slowing as the company gets larger and rival services from Microsoft and Google could eat into its business.

Shares of work messaging platform Slack didn’t slack off Thursday after they started trading under the ticker “WORK.”

The San Francisco company’s shares debuted on the New York Stock Exchange at $38.50 and rose slightly to close at $38.62.

Slack’s initial public offering is using an unusual approach known as a direct listing. In such cases, a company doesn’t hire underwriters or sell new shares to raise money; it simply lists existing shares. While there is no set price for the listing, Slack said in a regulatory filing that the volume-weighted average price of shares that changed hands in the private market from February through May was $26.38.

Slack aims to replace traditional work communication like email with its own messaging platform. Users start “channels,” or a group chat with a specific topic, rather than starting an email string about a subject. Slack says 600,000 organizations in more than 150 countries use Slack. That includes more than 10 million daily active users, who collectively spend more than 50 million hours in active use of Slack in a typical week, on either a free or paid subscription plan, according to the company. By contrast, Facebook has more than 2 billion users.

Slack’s listing is the latest in several highly anticipated tech IPOs. Rideshare companies Uber and Lyft, video conferencing company Zoom Video Communications and digital scrapbooking site Pinterest have all gone public in recent weeks.

They haven’t all been successes. Uber’s IPO in May was the most highly anticipated debut, but it hit a few potholes on opening day, closing down 8%.

Kathleen Smith, principal at Renaissance Capital, which researches IPOs, said a direct listing saves the company underwriting fees, but it means they have to have a strong investor relations program since initial shares aren’t being sold at a discount to attract buyers.

“It’s always a little challenging to get this kind of value into the market elegantly, we know it was challenging for Uber,” she said. “These very large IPOs can have a rocky road when they enter the market.”

Slack said earlier in June that for the February-April quarter, the company lost 26 cents per share as revenue jumped 67% to $134.8 million.

For the fiscal year ending in Jan. 31, 2020, it expects revenue to grow 47% to 50% year-over-year, totaling $590 million to $600 million.

Slack is the second major tech company to start trading with a direct listing after Spotify went public in April 2018. More than a year later, Spotify’s shares are trading at $147, about the same price at which it debuted.

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