The Curious Case of WeWork
WeWork represents the tip of the iceberg of a severe dichotomy between private and public markets. In a sort of reedition of “Barbarians at the Gates”, big houses, like Softbank, pushed by large sovereign and pension funds, are running an opaque business that melts down when it reaches the new ultra-transparent reality of the public markets.
The IPOs of Uber, Lyft, Snapchat and the coming quotations of AirBnB and WeWork are no longer exceptions, but they are becoming a worrying rule in the market.
Never before we have seen companies that rushed toward an IPO with bigger pre-IPO losses than WeWork and Uber.
The old age of private equity was full of fulgid examples of organic growth, pre and post IPOs. Companies went public presenting realistic scenarios of growth and, many times, innovative processes able to set high entry barriers, essential to justify valuations and guidance.
Unicorns are changing the paradigm. Uber and Lyft shares have plunged 29% and 48% from their respective peaks since their IPOs and the new approach of earlier investors and CEOs is today to actually rip off shareholders with obscene pre-IPO deals on preferential liquidity.
But the WeWork case goes beyond anything we saw before, like RBR Nabisco did in the ‘80s.
As private company, WeWork was “valued” at $47 billion. No financial statements are available but this sort of magic comes out from closed-door negotiations whose purpose can only be to beef up expectations.
Recently, the IPO valuation had fallen to as low as $10 billion.
In its SEC-filing, WeWork shows a company that made 1.8 bio in revenues in 2018 and had 1.9 bio of net losses. Revenues doubled between 2017 and 2018 but so did expenses as well.
Both WeWork and Uber have a lot in common, in terms of losses and cash-burn business models. In addition, gargantuan stock-based compensation costs and low entry-barriers.
Where does WeWork spend so much money?
Fixing up office properties. Office properties: the most cyclical commodity in the world.
In its filing WeWork writes:
“We have a history of losses and, especially if we continue to grow at an accelerated rate, we may be unable to achieve profitability at a company level (as determined in accordance with GAAP) for the foreseeable future.”
To create excitement, they actually wrote in the report that they expect revenue opportunities of $3 trillion. Literally. In other words, France’s GDP. How they came up with that number tells you a lot about their sickness. They have WeWork facilities in 111 cities and they plan to open offices in other 169 cities. They estimate a potential member population of approximately 255 million people. They multiply that number by the average revenue per WeWork membership and you’ve got $1.6 trillion.
With a bit of hocus-pocus, referred to the average occupancy cost of an employee they reach $3.0 trillion in revenues. What is produced in France in one year.
Apparently, they also plan to inundate members with adverts to increase revenues.
Yet, we have very little information, or none, about its financials. Good for us that in April 2018 they issued a note due in May 2025 that now trades at 91.25 cents on the dollar. To get a meager B+ from S&P they had to publish their stunning figures on net losses.
These losses of nearly $2 billion in 2018 are operating losses, and not investments in new office projects. After the company leases office space and decks it out, it takes up to 18 months to fill the space, and during that time, the space produces lots of expenses but revenues start out at zero and grow only gradually until the space is filled. That’s what they call: the price of expansion.
But then there is a lot of churn, as “members” might not need that desk for all that long, and WeWork has to work furiously to find new “members” to rent those desks, and that involves a lot of expenses as well.
Ok. They burn tons of money. What about the investors?
Its biggest investor is Japanese conglomerate Softbank. In January, Softbank agreed to a $2 billion deal of which only $1 billion was new funding. But that was down from an initially hyped $16 billion deal with $6 billion in new funding. Previously, WeWork had signed $4 billion in deals with Softbank, a $1 billion convertible note and a $3 billion warrant.
But WeWork is just one example.
Lyft lost shy of 1 billion in 2018, Uber loses about $800 million a quarter.
Slack share price is in freefall, while the company lost $360 million in a single quarter, from $32 million last year. Snapchat also is in the billion club in terms of yearly losses.
Only Pinterest, for the time being, seems to be an exception to the new burning-money rule. Operating losses are contained (once IPO expenses are netted out).
And from the land of Private Equity, that’s it folks… for now.