Workplace-messaging firm Slack is about to go public in a red-hot IPO market, but it's approach to going public — using a "direct listing" — is slightly different than an IPO.
The "direct listing" method revives some of the same issues and anxieties that came up when Spotify went public using the same method.
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But the world is a lot different than when Spotify went public on April 3, 2018.
Direct listings allow a company to go public without involving underwriters — those intermediaries who buy shares from the company or insiders and then sell them to the public. Instead, the shares simply begin trading on an exchange, in this case the NYSE.
Spotify was the first large company to use a direct listing. The worry at that time was simple: direct listings were an untested way to go public. There were two concerns: 1) because direct listings do not have an initial price that is sold to investors, it was not clear where the stock would open, and 2) In a direct listing, most of the shares are immediately available for trading (in Spotify's case, about 96%).
There was effectively no lockup period. The fear was that insiders would dump the stock en masse on the first day, leading to chaos.
Neither concern proved to be a major issue. Instead of an initial price that underwriters set to sell stock, Spotify and its advisors set a "reference price" of $132 that was roughly based on recent private trades. Spotify opened at $165.90 and closed at $149 on its first day of trading, up about 12%.
Fast forward to Slack, and those anxieties are much less evident. The NYSE has set a "reference price" of $26, based roughly on the price of private trades over the last few months (it has traded privately in a range of $25.75-$31.50).
As for the amount of shares available to trade, Renaissance Capital, which runs the Renaissance Capital IPO ETF (IPO), a basket of roughly the last 60 large IPOs, estimates that 283 million of the 599 million shares outstanding will be available to trade (47%).
Why isn't the entire share count available to trade? Slack is restricting sales for those who bought private shares less than a year ago, and anyone who is an officer, director, or significant holder of the company.
A bigger concern is who might — or might not — be selling. The six largest shareholders (Accel, Andreessen Horowitz, Social Capital, CEO Stewart Butterfield, SoftBank, and co-founder Cal Henderson) control about 60% of the stock. Some are restricted, but if the majority who are not decide to sit on their shares, supply/demand could be out of whack and the stock could be much more volatile.
As for the IPO environment, it's hard to envision a more perfect scenario. Investors have been eager to snap up any companies that show signs of growth this year, including those that are losing money:
(from initial price)
- Beyond Meat up 580%
- Zoom up 177%
- CrowdStrike up 125%
- PagerDuty up 127%
- Chewy up 70%
- Tradeweb up 56%
- Pinterest up 52%
The two laggards — Uber (down 3%), and Lyft (down 11%), are in a space — ride-hailing — that investors believe may have a very hard time becoming profitable any time in the future.
Slack does have high growth with recurring revenues, but it also has plenty of negatives: trading at roughly 34 times trailing revenues, losing money and with a very low barrier to entry.
A bigger concern may be that growth is decelerating: "2Q and FY20 revenue and billings guidance does suggest a meaningful deceleration from current levels," DA Davidson analyst Rishi N. Jaluria wrote in a recent report, noting that first quarter revenue growth fell to 67% year over year from 78%.
The biggest concern, though, may be its size: depending on the price, almost $8 billion in stock could theoretically be available to trade. That is an awful lot for even a bull IPO market to absorb. By comparison, Uber was an $8 billion IPO.
"Big IPOs are harder to get elegantly into the market," Kathleen Smith from Renaissance Capital told me.
The hope is that Slack will trade better long term than Spotify, which is trading at $146, below the $149 price it closed at on its first day of trading in April 2018.