Slack’s Soaring Stock May Plunge By As Much As 15%

Slack Technologies Inc.'s (WORK) stock has risen sharply over the past few trading sessions, jumping an incredible 33.5% versus an S&P 500's gain of about 8.6% through March 26. The stock's quick rise is a result of the work from home movement due to the rapidly spreading coronavirus. However, the technical chart is suggesting that the shares reverse and fall by as much a 15%.

The stock fell sharply following its fiscal fourth quarter 2020 results in the middle of March, after issuing weaker than expected fiscal first quarter and full-year 2021 guidance. Nevertheless, the shares have staged an impressive come back in recent days on a sudden inflow of paid users to its service.

The Stock May Soon Reverse Lower

The technical chart suggests that the recent rally may not last, and once the work from home trade fades, the stock could fall too. Many equities that cater to more people working from home have rallied sharply during this period of heightened stock market volatility.

Currently, Slack is rising and testing an essential level of technical resistance at a price of around $30. Should the stock fail to rise above that price, it seems it could fall back to a region of technical support around a price of $25.10 or perhaps as low as $24, a decline of roughly 15%. Volume levels have been falling in recent days, as the stock is rising, suggesting that the number of buyers is waning. Additionally, on the day the stock hit resistance and failed to break out, volume levels did surge, suggesting an increased number of sellers coming into the stock at roughly $30. Finally, the relative strength index is also trending lower, indicating that overall momentum is still leaving the stock and that it is likely to fall in the future.  

It is worth noting, especially in these volatile markets, if the stock can break out and rise above $30, it could go on to surge to around $34.30, its next significant level of technical resistance.

The Stock Isn't Cheap

Based on consensus analysts' earnings estimates, the company is forecast to lose about $0.20 per share in 2021, a loss $0.13 per share in 2022, and finally, turn a profit of $0.18 in 2023. Meanwhile, revenue is forecast to rise by 35.3% in 2021 to $852.9 million, followed by slower growth of roughly 31.5% in 2022 and an even slower growth rate approximately 24.7% in 2023. It makes the stock on a price to sales ratio very expensive, trading at 14.2 times 2022 sales of $1.125 billion.

What may be more problematic is that the company delivered weaker than expected first quarter sales guidance, at $186.5 million at the mid-point of the range, below estimates of $188.37 million. Meanwhile, full-year guidance was for $852 million at the mid-point versus estimates for $854.54 million.  It is true; these are minor misses during a period of workforce disruption; however, the stock is valued for hyper-growth, and preferably investors tend to look for positive earnings and revenue surprises in these scenarios.

Adding New Customers

Still, the shares have rallied sharply, following an update from the company that it added 7,000 new paid customers from February 1 through March 18. That was more than the roughly 5,000 paid customers the company added in each the third and fourth quarters. The company has seen a surge in usage in some of the countries hardest hit by the coronavirus, Italy, Japan, and South Korea.

Analysts have turned negative on the stock as well, with the average analysts' price target falling to $23.16 from $28.30 at the start of February. Clearly, Slack finds itself in a favorable position offering a product that appears to be in high demand during the current coronavirus crisis. However, it doesn't mean that its stock is cheap and can continue to rise.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

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