The Ratings Game: Slack follows in Zoom’s footsteps with huge stock surge

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Yesterday it was Zoom Video Communications Inc. Now it’s Slack Technologies Inc.

Communications-software stocks have gotten off to a strong start this week, and the coronavirus outbreak could be part of the reason. Amid Zoom’s ZM, -2.43%  15% stock-price rally Monday, some speculated that the shares were getting some extra love on expectations that Zoom’s videoconferencing software might come in handy due to fears over face-to-face meetings during the coronavirus scare, even though China isn’t a major market for the company.

While Zoom shares have pulled back a bit in Tuesday’s session, Slack’s stock WORK, +12.15%  is enjoying a rally of more than 10%. The stock could be riding the same sort of wave of enthusiasm that Zoom experienced a day earlier. Slack was also the subject of a bullish initiation note from RBC Capital Markets.

“We see Slack as having a leading brand, differentiated technology, and strong tailwinds from a growing workplace-collaboration market, which combined create an opportunity for the company to have durable, multiyear 30%+ growth,” wrote RBC’s Alex Zukin. He initiated coverage of Slack’s stock with an outperform rating and $25 target in a Tuesday note to clients.

See more: Slack stock surges after RBC starts coverage with bullish rating

In Zukin’s view, investors are underestimating Slack’s monetization potential. “Importantly, if Slack were to just win the majority of the developer market, its revenue could easily more than double over the next few years,” he wrote. Further, there are opportunities for Slack to increase the monetization of its “shared channels” function, which lets users at one company communicate with users of another.

His survey of Slack users and IT staffers found that “three-quarters of users today are leveraging the [shared channels] functionality and that an equal number of respondents expecting that the feature will result in increased Slack budgets.”

Zukin also argued that worries about competition from Microsoft Corp.’s Teams product seems “potentially overblown” due to Slack’s robust library of integrations with partner companies and the large size of the market for workplace-communications tools.

Slack’s Tuesday rally comes during a tough stretch for the stock, which traded as high as $42 following a direct listing last summer. Fears about competition have weighed on the shares since then, and the stock changed hands Tuesday near $23.

Slack’s stock is up 3% over the past month, as the S&P 500 SPX, +1.71%   has risen 5.2%.

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