There are several reasons why WeWork hasn’t been able to execute an IPO at a valuation that is acceptable to it and its main pre-IPO investors (first and foremost SoftBank).
The main reason is a lot of irrational actors drinking the Koolaid at the same time, followed by rational actors popping the bubble. The irrational actors are VCs, in particular SoftBank, and the rational actors are public markets investors in general.
The VCs have either been deluding themselves that WeWork is a technology company rather than a real estate company. Or they have deliberately been willing to invest at an absurd valuation, thinking that the public markets will be willing to drink the Koolaid. Either way, they have been wrong, at least so far.
One obvious thing is that WeWork’s business model is much closer to Servcorp or Regus than to Google or Facebook. It should not be valued on a multiple of sales, but rather on earnings or cash flow, both of which the company currently lacks. WeWork generated $1.5 billion in sales and a net loss of $690 million in the first half of 2019, according to company filings.
Publicly traded Servcorp trades at a 14x P/E and 1x EV/sales, and sports a 5% yield. It has a market cap of AUD$400 million. If WeWork traded on anything close to Servcorp multiples, it would be worth maybe $3 billion. We should of course give WeWork some credit — a premium, so to speak — for its brand or image as an innovative revolutionary in the co-working space, and also for it being earlier stage than Servcorp (though even that is debatable given how much WeWork has already expanded while taking on huge debt). Adam Neumann just stepped down as CEO, so any premium related to his “leadership” should now be reduced to a big fat zero (he will still be Nonexecutive Chairman but he won’t be running the show). So taking all that into consideration, maybe the business is worth 5x EV/sales for an enterprise value of $15 billion. Then subtracting whatever is the net debt including net lease obligations, equity is probably worth a lot less. In any case, the equity is worth far less than the $47 billion valuation it fetched from SoftBank in the latest funding round.
Coupled with the business model’s acute sensitivity to recession risk (short term rent contracts coupled with long term lease obligations is hardly a recession proof mix), I wouldn’t touch this stock with a 10 foot pole.
Lastly I’d comment that I would be very reluctant to invest in any company whose founder was touted as critical to its growth (as was Neumann in WeWork’s IPO filings) and who was then ousted from his own company. Or for that matter any company whose founder sold a huge chunk of his holdings ($700 million in this case) prior to the IPO — yes there are merits to diversification but if you are a true believer of your own business then you wouldn’t sell a share, right?
