Slack Ends Its First Trading Day Worth $21 Billion

Investors, say hello to the biggest tiny speck in the world.

A decade ago, serial entrepreneur Stewart Butterfield co-founded startup Tiny Speck, which made video games that ultimately failed to catch on. But instead of giving up, he refocused the company on a chat app that his small team had created to communicate among themselves.

On Thursday, shares in that business, renamed Slack Technologies, made an impressive public debut—closing at $38.62, 48% higher than the reference price set by the New York Stock Exchange on Wednesday. The company ended the day with a market value of $21 billion, or more than three times as much as retail giant Gap Inc.

Slack’s arrival on the New York Stock Exchange came through the unorthodox route of a direct listing rather than a conventional initial public offering. While many retail investors may not know the difference, Slack’s direct listing created uncertainty in the price at which it would start trading.

Instead of a definitive price recommended by Wall Street banks and approved by their corporate client, Slack had a reference price of $26 per share set by the NYSE. In the end, investors didn’t seem to care about the uncertainty.

Slack’s first-day pop is helping make June the strongest month for new tech stock offerings in some time. It also raises the pressure on the company to deliver continued growth and eventual profitability.

In that, said Michael Facemire, a vice president at market research firm Forrester, Slack faces some key challenges. One is to expand from its core tech industry clientele to more mainstream users. “They have to expand their reach to non-technical folks outside of the developer and the technologist crowd for them to grow their company to the extent they want,” he said.

While many Slack users praise its usefulness, especially compared to rival services, it’s difficult for those who haven’t used it to grasp its utility.

One way to expand its customer base is an old-fashioned one, Facemire said. “Some of it comes down to just good old enterprise sales. There’s a reason that companies like IBM and Microsoft and Oracle do so well: They know how to sell into the enterprise,” he said.

Other analysts believe that Slack is gaining some momentum in this area. “The adoption of Slack within enterprises is proving as viral as WhatsApp amongst consumers,” Dimitri Kallianiotis, an Atlantic Equities stock analyst, said in a research note Wednesday. Slack has an opportunity to become “the main hub used to access all applications, as WeChat has done so successfully in China,” he said.

And a separate research note from G.P. Bullhound, an M&A advisory firm, said Slack’s growing popularity could push its market cap to more than double to $50 billion by 2025. “Slack exhibits a rare combination of highly recurring revenue, very low churn, viral growth and extremely high engagement—taking the best of both worlds, enterprise and instant messengers.”

Another challenge is for Slack to continue making its service more useful. It’s designed to easily integrate other online services for corporations—from Google Drive to Microsoft 365—essentially becoming the glue that can unite a fragmented world of business software.

And yet some of these companies, notably Microsoft and Google, are Slack’s key rivals in the corporate technology market. Both Microsoft and Google also happen to have much more gunpowder in the form of cash on hand.

By bypassing an IPO, Slack forfeited the opportunity to raise more cash for itself, at least immediately. It has $800 million of cash, versus Microsoft’s $97 billion and $72 billion for Alphabet, Google’s parent.

Of the 600,000 customers that use Slack, only 95,000 pay for it so that they can get the additional features that come with it. “It presents both a challenge and an opportunity,” Facemire said.

Many companies have several different groups of employees using Slack’s free version. To create a single login, access multiple third-party applications, and get greater control over storing Slack messages, companies may start paying for premium features.

In 2013, when Slack was still a new service, Butterfield, who had previously co-founded photo service Flickr, before selling it to Yahoo, described it as a way to bring “all team communication into one place and make it searchable.” Today, it’s much more than that.

And Butterfield talks about it being a matter of time before the corporate email is obsolete. But email, sometimes called the Internet’s first killer-app, is more likely to evolve than die.

“Everybody is trying to be the email killer. We’ve heard this many times over the years,” said Facemire. “The reality is Slack isn’t so much an email killer as it is a reduction of very small, very transactional emails. It eliminates the painful emails that fill up inboxes and let’s us see the ones that provide value. The problem is that that whole long statement doesn’t make for good marketing.”