Barron's Streetwise - Slack and Okta: Work-From-Home Winners

Episode Date: May 1, 2020

The CEOs of Slack and Okta talk about what the Covid-19 pandemic means for cloud business software. Learn more about your ad choices. Visit megaphone.fm/adchoices

With record levels of dry powder available for investment, find out what's in store for private markets in 2025 and beyond. Listen to Crafting Capital in partnership with UBS at partners.wsj.com slash UBS, Spotify and Apple Podcasts. If this continues, I think the whole world gets pushed down this path of inevitability towards digital transformation. And that's good for us. And I think it's good for the whole software industry. Welcome to the Barron Streetwise podcast. I'm Jack Howe. The person you just heard, that's Stuart Butterfield. He's CEO and co-founder of a $15 billion company called Slack Technologies. Slack is an alternative to workplace email, and it's gaining popularity. We'll hear more from Stuart Butterfield, plus another CEO co-founder, Todd McKinnon, whose $18 billion company,

Okta, that's O-K-T-A, is also enjoying fast growth among workplace customers. In recent weeks, this podcast has focused on industries that have been laid low by the pandemic. Retail, entertainment, cars, energy. Today, we look at two tech companies that are doing just fine in the new work-from-home world. Meta, I have a question for you to test how carefully you've been tracking what's been going on with the stock market. Uh-oh. I don't know what you'll win or lose. I mean, if you get it right, what do you want to win? Can I choose anything?

Within reason, yeah. Well, I either want your minivan or your Chewbacca mask. The minivan is out of the question. The Chewbacca mask. We'reivan is out of the question. The Chewbacca mask. We're going to have to talk about that. Okay. The question is, what's the one-year return of the S&P 500? If you had bought into an S&P 500 index fund a year ago, where are you today?

Come within 10 percentage points. Maybe 10%? Oh. Oh, God. are you saying up 10%? It doesn't really matter because the answer is zero. The answer is flat, which means you just came within 10 percentage points. Does this mean I have to let go of my Chewbacca mask? Or the minivan. It's your choice. We'll have to think about that later. Whatever the case, it's crazy to think when you look at all the worrisome signs for the economy, you have plunging earnings for corporations, you have mass unemployment, some of the worst job losses we've ever seen. And yet the stock market in the U.S. was recently flat versus a year ago. That's how quickly stock prices have

bounced back from their lows. We don't have to ask whether the stock market looks expensive. We know it looks expensive. The S&P 500 trades at 18 times last year's earnings. And remember that last year's earnings were the best earnings had ever been. This year's earnings are going to be sharply lower. So whatever earnings are going to be this year, the S&P is trading at many more times those earnings. The stock market and the economy are really telling two totally different stories right now. The stock market is saying, we're back, baby. And the economy is saying, we're not back.

And please don't call me baby. I thought we talked about that. And people are losing their jobs. And unemployment is going to be sharply higher right now. And when people are out of work, that can not only mean that their budgets are tight, but it just tends to depress consumer sentiment. And it could be a while before the economy gets going again. Even when we open up the economy and we have stores open, we say, all right, you can get out of your houses and go back to doing what you're doing.

We don't know that people are going to get back to normal right away. It might take some time. So the question is, which one of those stories are we going to believe? What the stock market is telling us or what the economy is telling us? And really, I think what stock investors want to know is the fact that stocks look high relative to earnings right now. Does that mean we're going to be headed for another tumble in the stock market? That's the kind of question to ask Savita Subramanian. She's the top U.S. stock strategist at Bank of America Merrill Lynch. Hi, Savita. Yes. Hi, it's Jack Howell from Barron's. Hi, how are you? I suppose you won't be surprised if I ask you about the stock market. Right. That is my job. I asked Savita whether the fact that stocks look expensive relative to earnings now means that the market might tumble again soon.

One of the things that we've found is that valuation of the market doesn't necessarily matter for the short term. It has a very low predictive power over, you know, one year, two year returns for the S&P 500. So that's not good news, but it's not bad news either. The fact that stocks look expensive doesn't necessarily mean that we're headed for a fall in the market right now. Let's put a pin in that idea and come back to it in a moment. I asked Savita about long-term returns. If we're looking at the price of the market today, what can it tell us for the investor who's going to buy and hold, let's say, for the next decade?

What can it tell us for the investor who's going to buy and hold, let's say, for the next decade? It explains 80% of the returns variability over a 10-year time horizon. So, you know, at some level, valuation is almost all that matters if we're thinking about how to allocate for the next 10 years. So we can tell a lot about long-term returns from whether the market is expensive today. And when Savita says it explains 80% of returns variability, what she means is whether future returns are going to be good or bad. She says by her math, stocks right now are priced to return 6% a year, including dividends over the next 10 years. That's not the level of return that investors are used to from looking at the past few decades. They're used to something that investors are used to from looking at the past few decades. They're used to something closer to a low double digit yearly return in the stock market. But 6% would be much better

than investors are probably going to get from their bonds. The 10-year treasury right now yields less than 1%. So that means that long-term investors should stick with stocks, but keep their expectations for returns low because their starting point is fairly pricey. Now back to the short term. What are the chances that the market could dive back to its March low point? Savita says she expects the market to remain in a wide trading range as bad news about the economy rolls in over the course of this year. But that one scenario in particular

could send us back to the March low. I think that the biggest risk is a second wave of outbreaks. And, you know, I think that's what one could be worried about if we go back to business as usual too quickly. So I think in those scenarios, if we got a second wave, I think we definitely could retest the lows. So, of course, there's no way to know for sure whether stocks are going to head back to that March low. But what if they do? What if the market tumbles from here? One thing that Savita told me was that if you look at that low point, it was about $2,200 on the S&P 500. And if you start with the high point in February, and you look at the average bear market throughout history and how far stocks tend to fall, you find that they fell about as far as they do in the average bear

market. So she views that March low, about $2,200 on the S&P 500, as a good buying opportunity if we see it again. So I think that that's a reasonable kind of anchor at which to say, So I think that that's a reasonable kind of anchor at which to say, OK, this is where I start buying equities. The bottom line is that stocks are expensive, but you shouldn't sell out of them. You should hold them for the long term because you're likely to get so-so returns and so-so is likely to be better than what bonds will give you. But don't sell entirely out of bonds either because you need diversification. Stocks could slide in the short term. If they do, be ready to shift more money into stocks.

Meta, when would you say Slack began taking over our workplace? Like two years ago? Yeah, probably a little more. I might be a late Slack adopter and maybe a reluctant one too. I feel like I'm too busy to learn a new thing, but there are two problems. The first is I keep hearing from people who say, yeah, I'll message you on Slack. And at first that was just young people, but now it's old people too. Sometimes if I ignore things for long enough, they go away, but this one doesn't seem to be going away. And I'm starting to feel a little like an outsider with his nose pressed up against the Slack window, wondering what's going on in there.

The second problem is that my email is starting to resemble the national debt. It feels vaguely unsustainable. I've got about 40,000 emails in my inbox. I need to restore communication solvency. I like hearing from readers and listeners in my email. Maybe Slack can help with the work part. To find out, I called Stuart Butterfield, Slack's co-founder and CEO. Stuart, thanks for making a minute to speak with me. No problem. I confessed to Stuart that I'm a Slack slowpoke, and I asked him, what's all the fuss about? What makes Slack better than email? What if all of that email was organized by project or subject instead of by date? And what if everyone who should have access to it magically did without having to have been CC'd on it

in the first place? So in Slack, communication moves from inboxes, which are kind of inherently individual first to what we call channels. And channels put the organization or the team first. So email is kind of like sending a letter, whereas Slack is more of a chat platform. On email, you might say,

I hope this email finds you well. On Slack, Meadow, what would that translate to in Slack talk? I guess you would just say, hey. Sounds like a time saver. Yeah. Stuart says Slack can help workers free up time spent on communicating basic information in emails, meetings, or presentations

so they can focus more of their time on strategic or creative work. He says Slack isn't specifically a tool for remote work, but that quarantining is probably a net long-term benefit, not only for his business, but for other software businesses. So if this continues, I think the whole world gets pushed down for some organizations, maybe three or six months, for other organizations, three or five years, down this path of inevitability towards digital transformation. And that's good for us. And I think it's good for the whole software industry.

Slack makes money from selling subscriptions to its service. And Storch says his goal is to become massive. He says Slack has 110,000 customers of all sizes now, but that there are more than 20 times as many businesses in the U.S. with five or more employees. That's a lot of email to go after. I had two last questions for Stewart. The first is, am I the only one feeling super stressed about working from home right now and can Slack help with something like that? He says the software has playful features like emojis that are designed to make it feel more human. But he also says at-home workers probably wouldn't

feel so stressed now if it weren't for economic concerns, COVID-19, and difficult circumstances. Not everyone had a home office set up. Now you're arguing with your spouse about who gets which part of the kitchen table to do the next video call. And you have a three-year-old and a five-year-old and there's no daycare or preschool or school and no nannies and no grandparents available to help. And the kids are going bananas being cooped up in the house. So that's not normal. Now, Stuart is way off on the three and five-year-old part. My kids are five and nine, but everything else he said sounds pretty much spot on. The last thing I asked him was how he explains that before Slack, he had started a successful photo service

called Flickr. And before that, he had success in video games. What's the connection? It's a lot of the same ideas. People have a persona or an identity. They're able to send messages. They're able to form groups. There's a sense of presence. And those are kind of common elements to how networks can kind of improve the lives of people and create new possibilities for interactions that wouldn't have otherwise been possible. Meta?

Yeah? I think I'm ready to slack now. Really? I think I might need a spotter. I need someone to take me around, keep me safe, make sure none of the other slack experts bully me. You think you can help me out? All right, sure.

Where am I going? Do you know how to open slack? So, slack. Let's see. Here's slack. It sends me a little code on my watch this thing is like the nuclear football here i need here we go here's my code i'm in are you in slack right now i'm in it oh my god hi jack

oh i think that went through is that from the movie Aliens vs. Predator? Now you should be scrolling down, and then you can see people, names, direct messages. I see people. Is there a little number on the right of my name? That means I've messaged you. Yeah, it's got two. All these numbers, there's a long list of people with numbers next to their names. That is because they have messaged you thinking you were on Slack.

Oh, I suppose it's too late. Let's shift our attention from Slack to a company called Okta, which some people go through to get to Slack. It feels like a bit of a romper room language to me. It sounds these days like everyone's talking about Ubering up their Google and Grouponing over to WeWork to Smurfler some flip-flap. I'm tempted to start a company called Enterprise Software International just to be old school, and then I'd sell something like pancakes. But anyhow, Okta is the name, and let's find out why it's growing so

quickly. I called up Todd McKinnon. He's the CEO and co-founder of Okta with a K. It took us a minute to figure out our microphones. I'm a computer science major. I can do this. Are you untangling cords? I spend a lot of time untangling cords these days. You and me both. One thing that Okta does is called access management. Think about streaming. When you watch shows on Netflix or Amazon Prime or Disney+, there are a lot of companies that are competing to be the portal that you go through to access those services. Meta, when you binge watch Tiger King, like I know you have.

I have. I knew it. I knew it. Well, when you did that, Apple wanted you to go through its Apple TV box and your cable company wanted you to go through your cable box and so on. Now, Okta isn't in the streaming business. It wants to be the access point for programs that you use on the cloud. But Todd says that's only part of it. So we think about ourselves as enabling companies to adopt technology. So any kind of cloud service, any kind of software, any kind of devices, any kind of networks give customers flexibility.

Okta just had its 11th birthday earlier this year. And before starting Okta, Todd ran engineering at a company called Salesforce. They make some of those cloud apps. And what he said he saw back in the mid 2000s was that cloud computing was really taking off and that it was going to be about more than just the applications. We're going to have to build a system that can help IT departments and companies stitch all this technology together, this new wave of technology in a way that made it easy to use and secure. So it was really about the big sea change in technology and seeing that as an opportunity to build an important new company. So the question is, is any of this

changing in this new environment where more people are working from home? Todd says that shift was really inevitable anyhow, and long-term it's probably good for business. And that is just going to be a part of the future, regardless of what happens with COVID-19 or anything in the short term. And we see a lot of the things that are happening that companies are doing to react to COVID-19 is maybe accelerating that kind of inevitable long-term arc toward more technology being used for more flexible work. So I think that's a positive trend for the world and for Okta. So how much room does Okta have for growth? Todd says there are three things that bode well.

First of all, even though it's been a decade now, this migration to cloud applications, if you look at the entire market for business software, it's still a relatively small slice of it that has moved to cloud apps. So there's more to go there. The second trend is that all companies are having to develop more digital expertise from publishing to retail to manufacturing. As Todd says, if you're not becoming the Amazon of your business, Amazon might become the Amazon of your business. And the third trend is simply that everyone wants more security. All three of those trends play right into what Okta does.

All three of those trends play right into what Okta does. The future is incredibly bright, and it's the perfect place to be to build what we've been obsessed with building from the early days, which is this very important, massive, independent public software company. One last thing. What about the name? Todd says his business is all about enabling the cloud and that Okta is a meteorological scale for cloud cover used by pilots and airports. So if you have a one Okta, it's just a little bit of clouds. And if you have an eight Okta, that's complete cloud cover. So it's a kind of a clever name that is no one really knows what it means. They just think it means the identity company now, which I guess is kind of a cool thing. You know, Meta, I'm going to take back what I said about Okta's name now that Todd explained it to me.

I'm thinking about changing the name of my company. What was it? Enterprise Software International? I'm thinking maybe Fahrenheit to refer to kitchen temperatures and it could be a little inside joke about how we really make pancakes. What do you think? I think if that name is not already taken, which I'm guessing it is, I think it's a great idea. Meta, do we have a listener question to answer? We do, yeah.

We got one from Franklin who lives in West Des Moines, Iowa. And he actually says in his email that it would be a dream come true to have his question on the podcast. So I think we should do that one. Dream come true? Yeah. his question on the podcast. So I think we should do that one. Dream come true. Yeah. Franklin's going to need a new dream because this dream is about to come true. Roll it. Is that too dramatic? I mean, no, I'm going to roll it. All right, go ahead. Hey, I just got my car insurance bill and I noticed that it didn't go down, which surprised me.

In the short term, certainly the number of miles that we've driven are down and there's a lot less cars on the road. So it seems like there would be a lot less accidents for the insurance companies have to pay claims on. In the long term, the amount of data collection that insurance companies are gathering, plus the amount of safety features on the cars, seems to indicate that accidents would be down as well. And I was wondering if there were any trends that are interesting in the industry or competitiveness issues that would lead to perhaps my premiums going down. Thank you, Franklin. These are two excellent questions. The first one is, should you be getting money back from your auto insurer? Our corporate sibling MarketWatch reported on this story. What they said is that insurers are doing just that. They're sending

money back to their customers. They mentioned State Farm sending $2 billion back to customers. They mentioned Allstate, Geico, Liberty Mutual, USAA, and Chubb. And they had one piece of advice for people out there with this question of whether they have money coming back to them. Pick up the phone and ask. I'm not surprised if your insurer hasn't, you know, rushed to call you and tell you the good news. You know, usually good news coming your way doesn't travel quite as fast as good news going their way. But pick up the phone and ask them if you can get a break on that premium. The second part of your question is, will car insurance become cheaper over the long term

as cars become safer to drive because of advanced safety features and one day autonomous driving features? And the answer is, I'm quite confident that rates will come down because the car insurance marketplace is a competitive marketplace. Everyone out there wants to gain share by undercutting their competitors on price if they can. So they're going to reduce rates as it becomes less of a risk to insured drivers. People who think that autonomous driving is science fiction and it's never going to happen, it's going to happen. I have a simple definition of autonomous driving. I call it the Carrie

Underwood test. When the day comes when I can take both of my hands off the steering wheel, recline my seat, put both hands on a pastrami sandwich, and play Carrie Underwood's Jesus Take the Wheel and enjoy my sandwich without having to worry about driving, that will be autonomous driving. I don't know if that's a level 4 or a level 5, whichever category that fits into, but that's a long ways off. I think, I think we're more than a decade, you know, maybe a couple of decades from being there, but it's not an on-off switch. Between now and then, the safety content of cars is going to become more and more sophisticated.

And I think that will make accidents on the road rarer and rarer. I would hope so anyhow, and that should drive down costs for auto insurers. And because they're competitive with each other, I think they'll eventually pass that savings on to you. That's my hope anyhow. Thanks, Franklin from Iowa for sending in your question. And everyone keep the questions coming. Just tape on your phone, use the voice memo app, coming. Just tape on your phone, use the voice memo app, send in an email to jack.how, that's H-O-U-G-H, at barons.com. Thank you for listening. Meta Lutzoft is our producer, and thanks to Katie Ferguson for helping out. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, please leave a review. Follow me on Twitter to find out about stories and new podcast episodes.

That's at Jack Howe, H-O-U-G-H. See you next week. Meta, I did see the email that you sent me with the subject line, no pants reporter, about the guy on Good Morning America who didn't know that the camera was seeing his shorts below his waist. He was literally not wearing pants. That's a tough lesson for people who are doing TV from home. I just want to say, I vow to keep it professional.

No pantsless podcasting. Okay. It's a promise.