The IPO market is scalding hot with firms from tech to plant-based meats displaying extravagant returns. Slack WORK is the most recent listing, hitting the exchanges today and immediately surging more than 50% from its reference price. Seemingly just another unprofitable tech firm attempting to cash out before the end of the economic cycle, Slack has taken a much different approach to make their share available to the general public.
Slack decided to directly list its stock on the New York Stock Exchange, something that very few large corporations have attempted. This is only the second tech firm to have done this in the past year and a half with Spotify SPOT leading the charge in this unconventional stock debut format last April. Like Spotify, Slack isn’t in desperate need of cash but rather providing liquidity to its current investors. That makes the less expensive direct listing more appealing to current shareholders.
WORK traded up to a more than $20 billion market cap, roughly 3 times the valuation it saw in its last round of funding back in August of 2018. Investors are betting big on Slack with its price-to-sales (P/S) multiple sitting at 50x, multitudes higher than comparable tech firms. The reoccurring revenue that this firm is able to capture and retain is likely to propel this firm into robust profitability in the future as its revenues snowball.
Slack is connecting more than 10 million people around the world to get work done efficiently. Their goal of making email obsolete is slowly coming to fruition as this platform’s reach proliferates.
Traditional IPO vs. Direct Listing
Choosing to go with a traditional IPO gives companies more stability and security. With the conventional IPO model companies use an investment bank like JP Morgan JPM, Goldman SachsGS, Morgan Stanley MS, or a syndicate of them, to underwrite their offering. The underwriter will gather interest from banks, institutional investors, mutual funds, etc. The offer price will be decided by the underwriter based on financial data and the amount of interest that the underwriter was able to collect. During the initial sale, the investment bank(s) create a market for the stock, buying and selling shares to keep the price from becoming too volatile.
Going with a direct listing over an IPO comes with some significant risks. With a direct listing, the initial offer price is decided by the market on the day the shares become available. The exchange takes all the buy and sell orders to come to an opening price for the shares. With no investment bank making a market for the shares a lack of interest in the stock could cause the price to plummet and capital raised to be significantly less than anticipated.
The advantage of using the direct listing format to list shares is that there is no investment bank taking control. There is no underwriting fee or greenshoe for Wall Street to profit off of. The price of the stock isn’t just set by the big banks and institution but by the market, which includes smaller retail investor and traders. A direct listing allows everyone to get in on the “ground-floor” for a much more natural and equitable public offering. This format also permits existing shareholders to sell out of there shares immediately with no holding period, though Slack is restricting 53% of its shares to reduce the chances a selling frenzy. A problem that could arise is a lack of free-floating shares if not enough existing stockholders sell on the initial listing day, which could drive the stock above its fair value.
This progressive way of debuting company shares to the public could become a norm as the business world sees more and more successful direct listings. This would be devastating news for JP Morgan, Goldman Sachs, Morgan Stanley and investment banks around the globe who rely on IPO’s for a considerable portion of their revenue.
Slack has seen about 120 million share exchange hands in the 2.5 hours this stock has been available to the public. WORK is up to $41, almost 60% more than the $26 reference price. Investors are enthusiastic about this email killing company and the direct listing format isn’t inhibiting their excitement, with traders and investors pushing the valuation past 50x P/S. There are enormous expectations for Slack moving forward and it will be exciting to see if they are able to meet or exceed these.
Look for more and more companies to be using the progressive direct listing method. This could have a considerable negative impact on investment banks’ top-line in the long run. I think it will still be years before this format of “going public” could become a norm so don’t start shorting GS or JPM yet. Firms are still wary of equity markets and currently prefer using financial experts in investment banking to underwrite their offerings.
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