One out of every 10 Microsoft enterprise customers might switch to Slack, the upstart office-collaboration tool.
And that's not good news for Slack.
The San Francisco company is valued at about $10 billion by public-market investors who are betting that Slack's passionate "cult" user base will help it become a standard workplace tool — as common as email and mobile phones — in the corporate world.
But according to a recent report by the Wedbush Securities analysts Dan Ives and Strecker Backe, Slack's growth prospects might not be as wide open as investors believe. In particular, Ives said, Slack is about to crash into a Microsoft wall.
"Only 10% to 15% of the core Microsoft enterprise customer base is potentially 'in play' for Slack," Ives and Backe wrote in a recent note to investors, giving Slack an "Underperform" rating.
Microsoft has a rival product called Teams that offers similar capabilities and is available for free to existing Microsoft Office 365 business customers.
"We have spoken to many enterprise customers that have seriously contemplated Slack's enterprise tier solution, but in the final IT decision was viewed that Teams services will suffice with no extra charge for Office 365 customers," the Wedbush report said.
What's more, Microsoft CEO Satya Nadella is putting a lot of resources behind the Teams product to blunt the threat Slack presents to "wall-to-wall Microsoft shops," the analysts said.
Earlier this year, Microsoft said it had about 13 million daily active users, which it said put it ahead of Slack. Slack responded last month and said it had 12 million daily active users. That's less than Teams, but Slack was careful to highlight its user-engagement figures, which it said showed how much people like using the app.
Slack offers a freemium model where customers start on a free plan and then can move up to paid offerings, standard, plus, and enterprise. The company has 100,000 paying customers as of the second quarter of its 2020 fiscal year.
Slack CEO Stewart Butterfield has said that's still the way the company acquires most paid customers. "It's individual work groups, like some one person says we should check this out, and they get two to three, and then five or eight or 15 people using it, and that happens over and over again across the company," Butterfield said at a conference in Laguna Beach last month.
Slack is among a string of tech startups focused on corporate customers to recently enter the public markets. Zoom, which provides video-conferencing tools for companies using a similar "freemium" model, was one of the most successful public offerings of the year, with its stock now trading at roughly double the level of its IPO price.
Slack, which went public in June via an unorthodox direct listing, has seen its share sink about 47% below the level of its first days on the market.
If not Microsoft customers, then who?
If Wedbush's bleak view of Slack's prospects with Microsoft customers proves true, Slack will need to find its growth elsewhere.
Ives said Slack's challenge would be to get the about 500,000 organizations that use Slack's free-platform option to convert to paid users and drive growth over the next three to five years.
He does think Slack will continue to do well with small business and startups and midmarket companies. "I think their sweet spot is 500 to 2,000 seat enterprises that tend to be more next generation type companies," Ives said.
Ives does see Slack's integrations with other services as an advantage and thinks it offers a "sophisticated search and collaboration software that is embedded within an organization's workflow with topic, historical data maintenance, and group based features that are difficult for competitors to replicate." However, that may not be enough to take a significant portion of the market and beat Microsoft.
"The next step of growth will be a major uphill battle" for Slack, Ives said.
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