WeWork, which moved one step closer to IPO last week, touts creativity and inspiration as part of the intangible value that supposedly makes the co-working company stand out from the crowd.
It’s definitely providing some creativity and inspiration to analysts who are looking over the IPO. Some choice examples come from Insight Providers publishing on Smartkarma:
“To pull off this IPO at the most recent private market valuation (US$47 billion) would be like a 90-year granny trying to catch a live, lightning-quick chicken with her bare hands within 60 seconds,” says Douglas Kim, painting a vivid picture in the first of two Insights on the WeWork IPO.
The consensus is clear: WeWork (or The We Company, as they like to be called these days) does not seem like it will be profitable anytime soon, nor does it seem like its lofty private valuation can pass muster in the public markets.
But so far, so Uber (and other tech or tech-related “unicorns”). What makes this particular IPO so problematic?
Read Mio Kato’s full Insight: WeWork IPO: A Quantamental Analysis Aka Hey Uber, Hold My Beer!
The Power of We
The co-working, co-living, just generally co-everything company’s impending listing has eyebrows everywhere raised in disbelief. This Verge article (with an equally creative headline) does a good job of outlining some fundamental problems with WeWork.
Examples include its labyrinthine org chart, the tangled web between the company and its founder and CEO Adam Neumann, which would make any ESG-minded investor gasp, and its reliance on key shareholder SoftBank for its war chest.
WeWork’s spending has also been highlighted by the media, with Reuters highlighting how the company burned through US$2.36 billion in 1H2019.
Various sources that track private startup funding have pegged WeWork’s valuation at US$47 billion, as of its most recent funding round. With SoftBank as key shareholder, it’s obvious the company has some deep pockets to dig around in for petty cash. But many think the valuation is disproportionately inflated because of the Japanese mega-investor’s involvement.
In a follow-up Insight, Douglas Kim provides estimates WeWork’s revenue in 2019 to be up 87.6 percent year-on-year, at US$3.4 billion, and operating loss at US$2.7 billion. Kim further estimates the company’s revenue to increase by 66.1 percent CAGR and operating expenses to increase by 46.1 percent from 2018 to 2023.
Read Douglas Kim’s full Insight: The We Company (WeWork) IPO Valuation Analysis
Kim’s base case valuation of WeWork is around US$24 billion – quite a bit less than its current private market valuation.
Kirk Boodry also points towards the valuation at which the company did most of its fundraising, i.e. at US$17 billion to US$25 billion. “It seems clear the actual range has not strayed far from US$20 billion, which we think is high but not as unreasonable as the [US$47 billion valuation] implies,” he writes.
Read Kirk Boodry’s full Insight: Initial Thoughts on WeWork’s IPO Filing Aren’t Supportive of a Higher Valuation
As much as WeWork likes to trumpet its unique mission of “elevating the world’s consciousness”, the fact remains it is mostly a real estate operator specialising in communal use of work and living space. And it’s far from alone in that game.
Besides major competitor IWG, WeWork faces competition from a number of businesses in global markets. In Asia, for example, Sumeet Singh singles out JustCo, a rapidly growing Singapore-headquartered operator of co-working spaces that has been expanding across Southeast Asia and Australia, and UCommune, a co-working space company that has dominated China, where it was born, and now is spreading throughout Asia-Pacific.
Read Sumeet Singh’s full Insight: WeWork Pre-IPO – In the Business of Providing Flexibility by Being on the Hook for US$47.2bn
Singh points out that such competitors will be more appealing to price-conscious startups and freelancers for whom WeWork’s pricing appears just a little too far on the pricey side.
WeWork might have decided to focus on larger corporate clients lately, but such customers generally have better bargaining power and can command lower prices in return for more members and lower churn.
“While they will improve the revenue backlog, which was only at US$4 billion as of Jun 2019 (a little over one year’s worth of revenue), and probably help to keep the churn low, that will come at a cost of foregone revenue, in terms of higher discounts,” he writes.
Read Sumeet Singh’s full Insight: WeWork Pre-IPO – Problems with the Company’s Profitability Metrics and Evasive Profits
As lofty as WeWork’s stated vision is, it’s not hard to see reality quickly catching up. “Effectively a low price landlord, WeWork deals with brutal freeholders who demand long-term contracts while its clients are short-term and low-paying with exacting standards,” Rickin Thakrar points out. Its capital-intensive model does not align with any kind of sustainability, he writes.
Read Rickin Thakrar’s full Insight: WeWork IPO Preview: WeNeedCash?
Kato drives the point home when it comes to WeWork’s expenses, which include operating its various locations, general and administrative expenses, and depreciation and amortisation.
If the company keeps growing quarter-on-quarter at about 10 percent, as it did during the first two quarters of 2019, and maintains its current burn rate, it would burn through whatever cash it raised from an IPO within four quarters. That time frame would be even narrower if WeWork grows by about 25 percent a quarter.
Kato does not mince words: “This should not be a listed company.”
Lead image: WeWork