It’s been nearly a year since Wall Street firm Canaccord first recommended Slack Technologies (WORK) stock as a “buy” with a $40 price target. With Slack trading at $34 at the time (mid-July 2019), and Canaccord saying it would rise 18%, that buy recommendation sort of made sense. But it seemed to make progressively less and less sense as Slack stock slid lower and lower, ultimately bottoming at close to a 50% loss on March 16, 2020.
Along the way, Canaccord cut its price target on the stock to $25 a share — but maintained its “buy” rating, and kept on maintaining both the rating and the price target as Slack stock shot up to nearly $40, about a year after the initial recommendation, which was the price Canaccord had predicted it would fetch.
Now, Canaccord is fiddling around the edges once again.
Responding to Slack stock’s sell-off Friday, in the wake of what actually looked to be a pretty strong earnings report — sales up 50%, gross profit margins improving, and the quarterly net loss halved to just $0.13 per share — Canaccord analyst David Hynes has raised his price target on the shares 52% to $38. (To watch Hynes’ track record, click here)
As Hynes explains, “Slack’s FQ1 results were impressive just about any way you want to cut it.” The reason that investors sold off Slack stock by more than 14% Friday, therefore, wasn’t so much because of what it reported, but what it said it might report going forward. For example, in Q2, Slack is predicting that sales growth will slow from the 50% rate posted in Q1, to just “42% to 44%.” Sales growth for the whole year, moreover, is expected to slow even further — to “36% to 38%.”
And of course, Slack expects to lose money all year long.
Despite all this, Hynes insists he still likes the stock. Slack’s guidance looks “conservative,” says Hynes. And conservative guidance is appropriate given the uncertainties created by coronavirus, which is causing some large customers to lay off staff, at the same time as it threatens the viability of other, smaller customers — even as other, newer customers come on line to help offset the losses.
Being conservative, Slack’s guidance creates the potential for Slack to beat earnings should these new customers arrive in sufficient numbers to not just offset losses, but produce unexpectedly strong growth at Slack. And in fact, Hynes thinks that the “record 90,000+ net new free and paid users [added] during the quarter … represents a significant paid conversion opportunity” for Slack.
Granted, Hynes doesn’t even try to attempt to defend Slack’s valuation — an expensive 24 times trailing sales, and 17 times what Hynes thinks the company might take in next year. But given the potential for conservative guidance leading to “positive surprises” on sales growth, the analyst believes a series of earnings beats could excite investors enough to “push the stock higher” — perhaps as high as $38, which isn’t too far off from what Canaccord said a year ago.
If he’s right, at long last, rating this stock a “buy” now might finally make sense.
Looking at the consensus breakdown, opinions on Slack are more split. The bulls come in ahead, with 11 Buy ratings compared to 7 Holds and single Sell received over the previous three months. The upside potential lands at 8% as a result of its $34.59 stock price forecast.
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