Slack's Direct Offering Is Sailing into a Welcome Market for Tech IPOs

After a sluggish spring, technology companies braving stock offerings in the public market are finding a warmer reception this month. The biggest test will come later this week, when Slack Technologies is expected to start trading through a direct offering.

Slack’s chat and collaboration platform has become a workplace tool in 600,000 organizations, 95,000 of which are paying customers. The company will list its shares Thursday on the New York Stock Exchange under the ticker WORK. Late Wednesday, the NYSE set Slack’s stock reference price, which may help determine where it starts trading, at $26 a share, valuing the company around $15.6 billion.

Like Spotify, Slack will list its shares through the unusual route of a direct offering, bypassing the traditional IPO process, which involves hiring a team of investment banks as underwriters.

But Slack is likely to be helped by a trio of companies that staged their own IPOs last week, only to see their stocks surge in the subsequent days. CrowdStrike, a cloud-security company that went public on June 12, is trading 123% above its $34 a share offering price. Freelance-marketplace Fiverr and pet-supplies e-tailer Chewy also debuted last week, with their stocks having risen 53% and 60%, respectively, from their offering prices.

That success comes in contrast to the reception of long-awaited IPOs of Uber, Lyft, and Pinterest, which held out from going public for years and then underwhelmed once they hit the open market, where demand from small investors is typically a key factor in whether a newly listed stock rises or stumbles out the gate.

“People have been talking about Uber and Lyft going public for years—and when they finally go public, it becomes a fairly anticlimactic outcome,” says Duncan Rolph, a managing partner at Miracle Mile Advisors. “A lot of these newer companies like Chewy and Slack have a narrower focus, a business model that can be summed up in a couple of sentences, and a fresh storyline.”

It’s not uncommon for the stocks of newly listed companies to surge in the first days of trading, before drifting down the the following weeks and months. Whether engineered by underwriters to draw in retail investors or underpriced by companies to ensure a smooth listing, IPO candidates are often willing to leave money on the table. Such pops, however, can also whet the appetite among institutional investors for later offerings, which may be good news for Slack.

Slack was valued at $7.1 billion when it last raised a private round of funding in August 2018. Its revenue in the most recent quarter grew by 67% year-over-year to $135 million, while its net loss grew to $32 million from $25 million. At around $17 billion, Slack would be valued similarly to to Zoom and PagerDuty, two enterprise-cloud companies that went public in April 2019, according to private-capital data firm PitchBook. Zoom is now trading 173% above its offering price, while PagerDuty is 130% higher.

One uncertainty around Slack’s debut is its end run around the traditional IPO process, which can involve underwriting fees of 6% or 7% but can help ensure a smoother listing. As Scott Kupor of Andreessen Horowitz (a Slack investor) told Fortune this month, household-name tech companies like Spotify and Slack are the rare companies that can pull off a direct offering because many investors in the secondary markets are already familiar with their financials and valuation. Spotify went public in April 2018 and is currently trading at a modest 13% above its $132 a share offering price.

Should Slack’s direct offering go off without a major hitch, it could help pave the way for other tech IPOs before the traditional late-summer lull in the underwriting market. According to IPO Scoop, another 12 tech companies are in the listing pipeline, the fourth most active industry behind health care, financials, and consumer goods. None have the brand-name allure of Slack or Uber, but could benefit from the welcoming mood among investors right now.

Despite those good vibes, the IPO market in general has so far been quieter in 2019. So far, 66 companies in all industries have priced IPOs on U.S. exchanges this year, according to Renaissance Capital, a 20% decline from the same time a year ago. In total, 95 companies have filed for offerings this year, down 5% from a year ago. And yet overall their aftermarket performance has been strong. A stock index of newly public companies maintained by Renaissance is up 36%, more than double the rise in the S&P 500 Index.

Tech offerings may still see a banner year in 2019, simply because the companies going public are raising larger rounds. Once they hit the markets, though, investors remain more confident in companies that can convince investors they can keep growing while they push for profitability. Unlike Uber and Lyft, which have lost money as they struggle to draw in consumers, companies in the enterprise space are doing a better job of winning the confidence of investors in the long term.

That trend bodes well for Slack. “This market is hungry for good stories, and investors are paying up for growth that has a reasonable path to profitability,” Rolph says. “Slack is very popular and it’s growing pretty quickly, with a fairly targeted focus to replace email, which provides for a good story. Their execution so far suggests they may be able to close the gap in terms of losses.”