Cowen initiates Slack at outperform, calls shift to remote work a ‘major booster shot’

On Tuesday, Cowen analysts led by Derrick Wood initiated coverage of Slack with an outperform rating and a $45 price target, as it thinks COVID-19 and the shift to remote work will act as a major catalyst to accelerate adoption. The Final Round panel discusses.

Video transcript

MYLES UDLAND: All right. Welcome back to "The Final Round" here on Yahoo Finance-- Myles Udland with you in New York. It's time now for our "Call of the Day." And today, we're talking about Cowen's initiation of coverage on shares of Slack. The company putting a $45 price target on the stock and rating the stock with an outperform. And now, this is, I think, probably a straightforward call in that the world is working more from home. Slack enables kind of distributed workforce communication.

But I thought here, Seana, an interesting insight, or kind of the argument that Cowen made, is that Slack itself, the management of the company, might be underestimating its potential market by as much as 4x. I mean, Slack management's TAM-- so the total addressable market for the company-- they estimate at $28 billion. Cowen thinks it might actually be more like $100 billion.

SEANA SMITH: Yeah, that was really interesting, and also just the fact that they were talking about how this catalyzes Slack-- Slack's prop to a quote "nice to have" more towards a must-have. So we talk about the shift from work-from-home. And I think the last couple of times that we have talked about Slack, we've talked out the threat that comes from Microsoft Teams and what that means exactly for Slack and how serious Slack should really take notice and how big of a threat it could be for the company going forward.

And Cowen kind of disperses all that and just says that it's not that big of a threat and Slack is fine by itself-- it actually has competitive advantages when you put it up against Microsoft's Teams products. So that was interesting to me in this call. We already know-- in this call from Cowen. We've already seen some numbers from Slack. Obviously, we're going to get a clearer picture when the company reports earnings later this week. But they've already disclosed the fact that users grew by 25% in a single week in March. That was at the beginning of the coronavirus outbreak here in the US. They also said that Slack added 80% more paying customers in two months than it had in full previous quarters.

So the question now, I think, for this upcoming earnings call is how many of those numbers, how many of those users are paid users. And obviously, they're going to have to convert a lot of their freemium model to potentially paid users. That's the big thing that analysts want to know. But I mean, I like to use Slack. I know it's something that we use all the time here on Yahoo Finance. It certainly does come in handy. It clears up your inbox.

And you hear more and more people talking about it. I don't know about you guys, but when we first started using Slack a couple of years ago, I actually didn't know much about it. Not many of my friends who worked at other companies were using Slack, but now it's almost become a must-have. More and more companies are using Slack. They don't miss their emails. And I think once we see this adoption rate start to accelerate, and this work-from-home trend is obviously doing that, it will get-- it will really strengthen Slack here down the road.

DAN ROBERTS: Seana, I remember a few years ago when we switched from Atlassian hip chat to Slack, and a lot of the staff was reluctant-- most notably, Rick Newman. But since then, everyone has converted. You know, it's interesting, guys-- this Cowen note mentions that the competition from Microsoft Teams is overblown. I thought that was a little bit of a leap, because I think Slack should be concerned about Microsoft.

You know, Microsoft's size and the idea that, just anecdotally, it doesn't even seem to me that Microsoft has really overly pushed and marketed Teams so far. I mean, it's been able to just really grow in size thanks to existing Microsoft customers and converting them and saying, look, you're already on Microsoft ecosystem. You should just use Teams also instead of Slack. Now, to Seana's point, and I think it's a fair one, I think Slack is pretty sticky-- that is teams that use it really like it, and they might be hesitant to switch-- although I've also heard from people whose offices use Teams and like it.

But you know, in terms of the numbers, I think there is big pressure on Slack to share specifics now. Because in terms of the daily active user race, Microsoft quite recently, I think in April, shared that suddenly it had leaped all the way from 15 million or so a year ago to 75 million daily actives. And the most recent number we've had from Slack was 12.5 million.

I'm sure it has skyrocketed since then, but I don't know. Is it 75 million? I'd bet Microsoft Teams has an edge. And again, I think if Microsoft really wanted to, it could really broaden in gap between the two pretty easily. Now, that's not to say there can't be a few players. There are a lot of, you know, chat apps for enterprise. But I think it's a lot to say that Slack doesn't need to be so concerned about Microsoft Teams. I think it should.

MELODY HAHM: That's fascinating, Dan, because I interpreted this note to say that most people-- that Slack should be concerned, but the general consensus is that, yes, it's baked in. Like, we get it already. Microsoft has been a threat. It has been an existential threat from the beginning. But the fact that Slack has been able to continue building upon its momentum proves that it is a better product in many ways, and that-- I think the term that was used is best of breed.

So there is a difference. Even if it's the same sort of functionality, people will still gravitate. And startups in particular, if they're looking for a new platform to adopt, slack is the way to go. One thing I want to note about even the premium freemium model is that the free model, it doesn't save any of your conversation logs. So this whole argument that it could technically replace email, even in a free version, that's blatantly not true, right? There's no conversation that's saved. The next day, it's a blank slate.

That could obviously be a pro for some folks who do not want receipts of their words or of the conversation. But ultimately, let's be real-- you need to have kind of an ongoing log. And I think even for folks who are outside of coding, outside of any of the technical kind of collaboration that Slack offers, I think that is a huge reason as to why folks are upgrading during this time. Because if they want to have that constant dialogue, that's the only way to keep it saved.

And then one last note on the daily active users number-- there's been a lot of criticism actually facing Microsoft, because Microsoft says that 75 million number, but the way that it calculates it is as long as you do one active interaction in 24 hours. That literally could mean I'm liking something that Dan said in the random channel. It could mean I'm replying saying, yes. I will speak now.

Whereas the average Slack user spends about 90 minutes a day on the platform, so it really is, in the words of Cowen, comparing apples to oranges just in the way that users interact with the platform itself. And I think, to be honest, going into earnings on Thursday, Slack is very well-positioned. And I kind of agree with Cowen that it's been underestimated to a certain degree when you look at the stay-at-home portfolio of stocks-- when you see the Zooms skyrocketing, when you see the Docusigns performing very well.

DAN ROBERTS: I will say, guys, I do not think any of these chat apps replace email. I agree with Melody on that-- not just-- I think you said one of them doesn't, but I don't think any of them do. And I think that's kind of been a mischaracterization of the rise of these things. They still have their function. You still need email.

MYLES UDLAND: Yeah, I will say, though, I mean, if we go back in time to when we started to introduce the verb paradigm-- so something has won the category when we refer to it as verb, so I'm going to-- I'm going to Spotify that, Netflix is the canonical one-- I kind of wondered, has Slack become stickier in the workplace when the enjoyment of the service goes down as your engagement goes up? So in other words, the more stuff you have to respond to on Slack, the more annoying Slack becomes, the more integral and sticky it is as a part of your workflow.

I mean, I think email is, like, the number one example here. Email is completely invasive in all of our lives, an absolutely terrible annoyance 100% of the time. And yet, we all agree, right, that it's an indispensable part of being-- I guess what are we all, knowledge economy workers? That's fair to say.

MELODY HAHM: Yeah, that's a very kind way of putting our professions. But I do agree with you. I mean, thinking about the Ubering, thinking about-- to be honest, after Uber faced a lot of its own controversy, a lot of people started saying, like, I'm going to use Lyft, or I'm Lyfting it. Yes, it doesn't actually roll off the tongue quite as nicely, but I did see that change overall. And then I want to point out one more thing about the founder and CEO, Stewart Butterfield.

He has been very vocal and an activist of sorts during this time of the Black Lives Matter movement. But even prior to this, I had done some reporting just based on employees, and the diversity and inclusion numbers out of Slack are-- kind of doubled the average percentage you see in Silicon Valley overall. So they-- you know, it's not an amazing feat, but there has been that focus and attention that's been paid into creating a really equitable workforce from the early days.

And Stewart actually tweeted several days ago that next week, Slack has its quarterly earnings call, so I have some extra eyes on me. And he says, quote, "I'll use that attention to amplify black voices and also to condemn not just the violence, but the indifference, the lack of compassion, the deflection, and excuses." I haven't heard any other publicly traded CEO kind of alluding to the fact that they're going to talk about this at length during an earnings call, and not just in a simple tweet.

MYLES UDLAND: And of course, the next real earnings season, Melody, isn't until, like, mid-July. And so who knows where we are by then? And we're not going to hear from a lot of these companies. We're not scheduled to hear from them for quite some time. So who knows if we ever will hear more than just the statements that we discussed yesterday and we'll probably discuss in the days ahead?