Slack Is Going Public Without an IPO – How a Direct Listing Works
fortune.com
fortune.com
Is it wrong to interpret this as other people expecting the bubble to pop soon and wanting to pass the bag sooner rather than later?
Another interpretation: they don’t care for the terms underwriters are offering, and think a better price can be set offering shares directly to investors. And that a good price serves everyone well.
Google had a rough go of it, IIRC, and there is some risk that institutional investors will sit the round out without their banking partners running the show.
Pharma & biotech companies as one example (the market has seen far more IPOs in that sector over the last year than it has large tech companies using their IPO as an exit), are still very frequently doing IPOs so they can raise operational cash to burn and to use their public stock for funding and acquisitions later.
In a traditional IPO, the company finds a bank to underwrite the deal and that bank gets shares. That bank is then taking on the risk of the shares flopping and tries to sell. The SEC rules protect the underwriting bank from competition during that time.
In a direct listing, the shares are coming from the current shareholders, so there is no need to stop competition because there is no third party to compete against.
A Cynic might say the bank expects a bubble 6 mo out, but I'd assume that's either baked into the fees/cost (4-7% as per the article) or they believe the shares of the company will be worth more eventually.
It seems pretty obvious that we’re in a bubble, given the excessive valuations and obvious signs such as the incredible rise of WeWork and “me too” startup culture. But the nature of a bubble is that such things are normalised and rationalised. What’s particularly difficult about this bubble is that economic conditions have conspired to maintain it far longer that the .com boom, which has meant predictions of the burst have been premature.
I definitely think we’re in a better place than the late 90s, but it’s still a bubble. Perhaps such cyclic swings are inevitable; just wish we’d done more constructive and positive things than Uber, Airbnb, Facebook, Twitter, with this era of cheap money. Could have had more Teslas and SpaceXs.
Making the stock immediately valuable is very important
The current stock price, Slack's market cap is half of Tesla's. And, a lot of people think that Tesla is overvalued.
So to the OP, yeah I totally agree. It's fascinating.
If a company lost $10 one year, $5 another, and broke even the third a guess of making money the fourth year is probably more reasonable than a guess of making the average, even with a marginal book value.
Therefore, I don’t think it’s that surprising that companies losing money are still worth a lot.
This isn’t always a reasonable way to think of things, though. It’s important to consider the actual realities of the business. For Slack, I think it’s largely fine. There really shouldn’t be a hard constraint preventing them from making shit tons of money.
Uber and Lyft are a different story. I have a hard time imagining a situation in which those companies will ever be profitable, even with self-driving cars, save one buying out the other.
I think that is what is going on with Uber. Their current core business will never earn enough to justify their valuations. Investors assume it will add new divisions and capabilities.
IMO the best justification for Slack's market value is that its likely to be acquired by one of the mega-cap tech companies in the relatively near future.
Alone it may not be a profitable business, but integrated into a broader ecosystem like AWS or Microsoft Office or Facebook's network, may result in extremely valuable synergies.
"Cost of revenue consists primarily of expenses related to hosting Slack and providing ongoing customer support for paid customers. These expenses include employee compensation (including stock-based compensation) and other employee-related expenses for customer experience and technical operations staff, payments to outside service providers, third-party hosting costs, payment processing fees, and amortization expense associated with internally-developed and purchased technology. We expect our cost of revenue to continue to increase in absolute dollar amounts as we grow our business and revenue."
That amortization could be significant; it's likely that they're not spending $5 in hosting and devops alone. It may not be pennies, but it's way less than the cost of a car.
To service their order book, they just need a skeleton crew. And the order book should be the bottom line for the bulk of investors.
That's before compression.
Multiplying that stock price by the number of outstanding shares provides a number known as market capitalization, but it is not THE value that an organization provides to society.
Obviously, rational & efficient market behavior breaks down in reality. But tell me, how does it break down exactly? What alternative measurement of intrinsic value is better, and in what sense?
If you have special knowledge of what subjective / behavioral differences current trading patterns exhibit in contrast to rational or efficient behavior, then by all means share it, or make trading decisions with it, because it means you can measure / predict something pretty much no one else can.
But if you don’t have that special knowledge, then how exactly can you know the prevailing market prices are not actually reflecting intrinsic value?
The stock market exhibits massive changes without much new information except information about the actions of other investors. You can similarly believe something is basically worthless (e.g. crypto) and simultaneously believe the price will not go down in the next long while due to investor behavior. The opposite is especially true for non dividend stocks.
Dismissing something obvious and derived by a large-scale aggregation of views in favor of something contrarian and unsubstantiated is much more similar to religious arguments.
Consider the current state of the economy. People have lots of money with fewer places to put it. Lots of people just dump it into index funds. That means more shares of large companies are bought, which means the price of those shares is going to go up. This is happening as a fixed function based on total market cap. Did we really get any new information to believe that npv of future cash flows had gone up? Nah.
If you have a reason to think for example that “dumping money into index funds” is somehow inefficient, please share! If the resulting price of companies in the index is a mispricing opportunity, let us know!
Yes, and the “price” is not the expected net value of future cash flows, it’s an estimate of what people are going to pay for it. The price and the value are two distinct concepts.
> If you have a reason to think for example that “dumping money into index funds” is somehow inefficient, please share! If the resulting price of companies in the index is a mispricing opportunity, let us know!
I know that you’re taking a positive “well show me” kind of stance to imply that I don’t know the market better than the people actively involved in it. But I’m not claiming to know where prices should be. I’m claiming prices are driven by a variety of things, one of which is value, but much of which is just various unsubstantiated assumptions. Many of those assumptions could be entirely incorrect. That does not mean the market will realize this soon, or ever, so assuming that any particular world view of what’s incorrect will materialize in a price change isn’t the wisest decision.
For capital gains oriented growth tech stocks especially, significant money has been invested because of a simple lack of alternatives, which has inflated prices. Should those prices fall? Irrelevant question, because value is not the sole driver of price. Irrationality is a part of the system.
That should say everything you need to know
Never saw a Slack-Tesla or AOL-Exxon kind of mixture though.
FANNG's market valuations are vastly larger than their knock down economic effects on the rest of the economy compared to GM/GE in the 1950's.
I’m curious how symbols are assigned. Most companies have symbols that are similar to their names. Can companies just choose anything they want? Or do you have to be a big player with connections to score a vanity symbol like this one?
> “The ball’s pretty much in the company’s court, as long as its choice isn’t already in use and won’t offend anyone’s delicate sensibilities. The NYSE requires that companies submit their symbol requests at least 20 days before they mail out notification to shareholders and that they list a first, second, and third choice. The exchange rarely gives a thumbs-down to the preferred option. One notable rejection occurred in 1992 and involved Furr’s/Bishop’s Inc., a Texas-based cafeteria operator that wanted to disassociate itself from its floundering holding company, Cavalcade Holdings Inc. But the NYSE denied the company’s application for the symbol FBI, on the grounds that it might cause confusion with a well-known law-enforcement agency, and Furr’s/Bishop’s was forced to remain CHI on the board. (The beleaguered company, later delisted from the NYSE, eventually changed its name to Furr’s Restaurant Group—FRRG on the ignominious pink sheets—and has since filed for bankruptcy.)
Some companies select cheeky symbols, rather than mere acronyms. The father of the trend may be Southwest Airlines, which was first listed as LUV in 1971—a nod to its origins at Dallas’ Love Field. Other semi-clever tags include BID for auctioneer Sotheby’s, FUN for amusement park operator Cedar Fair, and BUNZ for deli chain Schlotzsky’s. It’s a lot easier to come up with something witty if you’re listed on the Nasdaq, as that exchange allows symbols to be up to five letters long; the NYSE sticks with a 3-letter limit.”
In contrast, if you're actually going public to raise more capital, direct listings are a lot riskier. Basically the point of the IPO, and paying investment banks huge fees, is to select and handhold the new investors.
The investment bankers perform a lot of work around actually getting supply to meet demand. They're doing roadshows in front of potential investors, getting feedback on the best way to present the company, trying to determine what the market would price the company, etc. They're also making some effort to curate a higher-quality investor base, i.e. those who actually believe in the company's vision and aren't likely to flip the shares for easy money or sell out at the first sign of trouble.
The reason for the traditional IPO pop mostly has to do with compensating these types of investors for making a commitment and taking a risk on an unproven stock.
Now if it's definitely debatable whether what the company pays in the form of investment banking fees and systematic underpricing is actually worth it. But the point is that for a company like Slack, which isn't raising capital, it's almost certainly not worth it. On the flip side the success of this particular doesn't necessarily tell you anything about how much value a traditional IPO does or doesn't add.
You'd have been super lucky to get some shares at where it opened at $38.88 (12:08 EST). It immediately shot up to daily high of $41.95 which is most likely where retail trades would have executed at (assuming you used a market order, which you never should). Always buy with limit orders. See the following screenshot of the graph of today[1] of $WORK for reference.
Yeah I don't get why market orders even exist. If you're doing something that usually costs thousands to millions, is it ever a meaningful benefit to saving a click or two and a few keystrokes?
If my broker had an option to remove my ability to do market orders (sell or buy) I would immediately enable that.
Have you ever needed to exit a trade in a hurry? Or been buying something on the way up?
What I care about is that it sells.
It's hold-over from the dotcom days when I saw colleagues sell options with a limit order just above the current listed price that never got fulfilled in an a constant down market.
Market order just means sell it at what it's worth right now.
The advice to generally use limit orders is good though. Rarely would a retail investor need a market order.
The “reference price” is meaningless because it meant absolutely nothing. It wasnt the price it opened at. So why should we base the % change from that imaginary price. And this is was a direct listing so not even an underwriter got a 50% pop.
The media just wants to make things sound more impressive than it really are.
I mean do you really think you can divide the valuation of a company by their user base and think it means anything?
I really hope that isn't how you make decisions with investing your personal money...