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Microsoft's Latest Announcement Spells Trouble for Slack

Shares of Slack Technologies (NYSE: WORK) showed a lot of potential when the company first went public earlier this year, but have since failed to live up to that early promise. The stock soared on its first day of trading back on June 20 but has continued to drift downward in the months since.

Things went from bad to worse after Slack issued its inaugural quarterly earnings report, as its losses came in worse than expected.

Slack took another hit Tuesday when Microsoft (NASDAQ: MSFT) announced that its rival communication software continued to extend its lead over its smaller competitor. This sent Slack's stock down more than 9% on fears that Microsoft would continue to gain share at Slack's expense.

A screenshot of Slack's workplace collaboration app.

A screenshot of Slack's workplace collaboration app. Image source: Slack.

Growing like gangbusters

In a blog post Tuesday, corporate vice president Jared Spataro announced that Microsoft's Teams business communication software -- which competes directly with Slack -- had grown to over 20 million daily active users (DAUs). This number is sharply higher than the 13 million DAUs Microsoft announced on its fiscal Q4 conference call back in July, an increase of 7 million and up more than 53% in the past four months alone. To put that into context, Slack said that as of September 2019, it had surpassed 12 million DAUs.

This seems to support Microsoft's previous assertions that Teams was the "fastest growing business app" in company history. It also seems to spell trouble for rival Slack.

Home-field advantage

Teams enjoys a significant advantage by being part of Microsoft's Office 365 software-as-a-service (SaaS) platform, which boasts more than 200 million monthly active users, making it fertile ground to cultivate Teams users. Microsoft has previously stated that 91 of the Fortune 100 companies used Teams, and more than 150 organizations had racked up over 10,000 users each. 

Spataro said Teams is a stepping-stone to deeper use: "What's more, while these users start with simple text-based chat, they quickly move on to richer forms of communication and collaboration. For instance, last month Teams customers participated in more than 27 million voice or video meetings and performed over 220 million open, edit, or download actions on files stored in Teams."

Not all users are created equal

Slack has pushed back at the way Microsoft counts its users, saying, "Not all daily active users are created equal," and pointing to engagement as a better measure. The company cited a survey that reported that 87% of U.S.-based Slack users said the platform "improved communication and collaboration inside their organization." Slack also said that among its paid customers, user spend more than 9 hours per workday connected to the service and 90 minutes per workday actively using its platform. 

In an interview with The Wall Street Journal, Slack CEO Stewart Butterfield went so far as to say, "There's still a lot of people choosing Slack, despite the fact that they have Teams bundled in for free." He reiterated the point during the company's conference call, saying even customers that pay for Office 365 still want to use Slack when they need to collaborate. "They still chose Slack, because only Slack was capable of meeting their needs," Butterfield said. 

A difference of opinion

The executives of Microsoft and Slack clearly have a difference of opinion regarding who offers a better solution for team collaboration. The tech giant seems to believe the most important factor is sheer numbers, while Slack believes engagement will ultimately rule the day.

Unfortunately for Slack, Wall Street is more of a numbers game. Based on the stock's reaction following today's announcement, Slack still has much to prove if it wants to win the hearts and minds of investors.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Danny Vena has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and Slack Technologies and recommends the following options: long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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