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Wednesday 14 August 2019

WeWork files IPO prospectus

A Bubble valuation or the next Amazon?

WeWork LogoAn increasing number of my meetings these days seem to be with companies working from WeWork offices. As WeWork’s prospectus for its Sept IPO shows, revenues are growing fast - 2019 H1 revenues doubled to $1.54b compared to 2018 H1. WeWork now has 520 offices in 111 cities. Just like Cloud Computing, WeWork means that you can have just the amount of office space you need and grow it rapidly if required but only take on a short term lease/rent commitment. I well remember, in my start up days, having to commit to long leases with onerous clauses. I know many entrepreneurs who got personally ruined - not by their businesses - but by the lease obligations they took on. So I can really see the merits of the model.

We Work (to be called the WE Company from now on) is also expanding into housing (WeLive) and education (WeGrow)

Mark SqBut, but, but I can also see the downsides. For as long as WeWork has been in existence, we’ve had a growth - some might even say ‘boom’ - market. Many start-ups and scale-ups use WeWork. On top of that big companies have been changing the way they house their staff - moving to hotdesking etc. I think that WeWork is highly susceptible to a downturn which could see reduced demand, customers rapidly reducing (rather than increasing) the space they need and many more defaults. Tenants are on short leases - but WeWork takes on LONG leases. WeWork has lease obligations totalling $17.9b - or $47.2b when not discounted for accounting purposes. Remind you of anything??

Many commentators believe we are on the cusp of a global slowdown (see Germany today and the global equity sell off on US recession fears) Indeed the opinion is that WeWork needs to get its IPO away quickly before it is bitten.

Then we come to the losses. On revenue of $1.54b in 2019 H1, WeWork made a loss of $905m (up from $723m a year back) In 2018 as a whole, WeWork had losses of $1.9b - joining that club of companies with losses > than their revenues! Call me old-fashioned, but I’ve never seen that as a good look!

And finally we get to the valuation. The last fund raising was at an implied valuation of $47b when Softbank (WeWork’s largest backer) invested $2b in Jan 19. Will they get anything close to that in an IPO? I suspect the founders think not as they seem to be selling their shares in the last round before the IPO. Not a great sign!

In summary, WeWork fills a need, is well regarded by its users. Like others it is an arch disrupter. But it is hugely vulnerable to a downturn. It is still a huge loss-maker and its valuation seems to me to be firmly in Bubble Territory. Conversely, so was Amazon in its early days...

Posted by Richard Holway at '16:58'

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