I do not expect an IPO in 2020.
- WeWork has gone from a $47 juggernaut sweeping all before it to a company that so desperate for cash that it will have to layoff a large portion of its workforce to stay afloat.
- Any IPO in 2020 will require an immediate route to profitability and I suspect a valuation of less than $10bn but I don’t think SoftBank which owns 29% will want to take a hit of this size.
- I have no doubt that WeWork can be turned into a viable company, but this company will look more like its rivals than the technology powerhouse that it dreamed of becoming.
- It will also leave SoftBank nursing another thumping loss which will anger its Vision Fund partners and make it very difficult to raise the second $100bn fund which I think will now also be shelved.
- This latest move is symptomatic of the very difficult position that the company now finds itself in.
- The valuation and reputation of the company have been hanging on its growth rate of over 100% which when looking at its accounts has clearly been achieved through very low pricing.
- WeWork’s H1 2019 gross margins were 20% before any depreciation or amortisation (a key cost line for a real estate business).
- Adding this in gives gross margins of just 3% which is a clear indication that the company is effectively buying growth with cheap prices.
- Anecdotal discussions with some of WeWork’s customers reveals a practice of very heavy discounting to get clients in the door and further discounting when they threaten to leave which fits exactly what is observed in the income statement.
- This, and blue sky dreaming have been the source of WeWork’s valuation but now that funds that were dependent on the IPO will no longer materialise, other avenues have to be sought.
- This is why WeWork is now in discussions with its bankers with regard to funding which will now come with a requirement for a rapid and clear route to profitability.
- This is where the job cuts are coming from and if The Information is right (see here), one-third of the workforce is heading for the door.
- This is unlikely to impact gross margins much as the staff whose salaries are counted here are needed to look after clients.
- It is the 92% of revenue that is spent on expenses outside of its rental locations is where the hammer is going to fall.
- I suspect also that WeWork is going to have to increase prices to be at least in line with the industry, meaning that growth is going to crash.
- There are no barriers to entry that I can see and from analysing the business model and visiting several of its offices, there is no sign of a technology platform that lifts this company above its peers.
- Consequently, I think that a profitable WeWork will see growth of around 10% with margins in the 5% range just like everyone else.
- On a like for like comparison with IWG, this would give a valuation of $4bn – $5bn once all the corporate governance issues have been sorted out.
- This represents a 90% haircut on the valuation that SoftBank booked when it financed WeWork in January, and to be conservative, it should write down its $13.6bn investment in WeWork by $12.3bn.
- In light of its current difficulties, I suspect that SoftBank will be very unwilling to take a write-down of that size and so I see it being unfavourable to an IPO of WeWork for the foreseeable future.
- It will be a much smaller, less flashy but profitable and cash generative WeWork that creeps onto the public market sometime in the next 5 to 10 years.
