Zoom vs Slack — A tale of two growth unicorns
By: Pankaj Sood
Tags: Startup Growth, Zoom, Valuation, Slack, Unicorns

With a few unicorns going public, 2019 is turning out to be pretty exciting. Zoom went public almost 2 weeks ago and Slack will be going public soon. As part of the IPO process both companies had to release their S-1, giving us a glimpse of their financials till date. And while both companies have had tremendous growth, and bright futures, it appears that Zoom might have a brighter future — based on its higher growth rate and lower overall expenses.

I attempt to undertake a simple analysis to determine an appropriate valuation for Slack, given Zoom’s valuation. I could have a used a more detailed analysis using metrics like subscriber growth, costs to acquire customers, lifetime value of customers, cost of capital etc but I am opting for a much more simple approach. I am looking at the financial performance from the last 3 years, assuming a similar decline in revenue growth rates for both companies, and assuming a slightly more aggressive decline in costs for Slack. I will use that to build a 10 year forecast for both companies and try to identify Slack relative to Zoom.

Zoom — Potential Forecast

Zoom grew its revenues from $61 Million in 2016 to $151 Million in 2017 and $331 Million in 2018, giving it a revenue growth rate of 149% and 118% respectively. Zoom’s total costs went up from $61 Million in 2016 to $156 Million in 2017 and $324 Million in 2018.

I have used the following assumptions to come up with the 10 year forecast for Zoom’s financials:

Revenue growth rate declines by 20% per year for the first 5 years and declines by 10% for the last 5 years

Cost of Revenue, as a percentage of revenue, declines by 5% year over year

Sales & Marketing costs, as a percentage of revenue, decline by 2.5% year over year

R&D costs stay around 10% of revenues

General & Administration costs will stay around 12.5% of revenue per year

Slack — Potential Forecast

Slack grew its revenues from $105 Million in 2016 to $221 Million in 2017 and $401 Million in 2018, giving it a revenue growth rate of 110% and 82% respectively. Slack’s total costs went up from $254 Million in 2016 to $364 Million in 2017 and $555 Million in 2018. And while Slack has done really well in growing revenues, it still needs to identify ways to control costs in the next few years.

I have used the following assumptions to come up with the 10 year forecast for Slack’s financials:

Revenue growth rate declines by 20% per year for the first 5 years and declines by 10% for the last 5 years

Cost of Revenue stays around 12% of revenue

Sales & Marketing costs, as a percentage of revenue, decline by 2.5% year over year

Slack’s R&D costs have been coming down, as a percentage of revenues, over the last few years. However the R&D costs are still substantial. I am assuming that the R&D costs will increase (in absolute terms) by 10% a year for the first 5 years and will normalize to around 10% of revenues for the next 5 years

General & Administration costs, as a percentage of revenue, will decline by 5% year over year

Given the current revenue growth trends and associated costs, it might be 5 years before Slack starts to generate profits from operations. That in itself is not a bad thing, as most of the revenues and investment dollars are being used to grow revenues.

Zoom vs Slack

Slack posted revenues of $105 Million in 2016, compared to Zoom’s $61 Million. Zoom started to close the revenue gap by posting $151 million in revenues in 2017, compared to $221 Million for Slack. The revenue gap was further narrowed in 2018 when Zoom posted $331 Million in revenue, compared to $401 Million for Slack. Looking at the potential revenue growth rates, I expect Zoom to surpass Slack in annual revenues by the end of 2020.

I expect Zoom to continue widening the revenue gap, given its higher growth rate. I am expecting Zoom to generate substantially more revenue than Slack by 2029.

Beyond revenues, I am expecting Slack to also continue generating a higher profit from operations. I expect Slack will have the ability to cut costs more aggressively, as Zoom seem to be pretty capital efficient already. However I still expect Zoom to generate much higher profits by 2029 because of their higher growth rate and being more capital efficient.

Slack Valuation

Given that I expect Slack to trail Zoom in growth rates, revenues and profits over the longer term, I expect Slack to be worth about half of the value of Zoom today. Given that Zoom is currently being valued at $17.5 Billion, anything over $9 Billion for Slack will be a hard sell for me. I am expecting Slack to rise, substantially, in value over the next 10 years. However given other current and potential investment opportunities like Zoom, Uber and potentially Airbnb I will probably hold off on investing in Slack at the current secondary market valuation of $17 Billion.