There has been a lot of commentary this year about the record number of money-losing companies that are pursuing initial public offerings. It has not boded well for all companies IPO-ing, but still the richly-valued WeWork pushes on toward its IPO.
Lyft (NASDAQ:LYFT) and Uber (NYSE:UBER) have been hit hard by the skepticism surrounding their billion-dollar losses. Uber stock has recovered somewhat, trading back near its initial offer price around the $42 mark. However, LYFT stock is still down almost 14 percent since it started trading.
It is clear that investors have become pickier about what type of losses they are willing to tolerate. After all, no one likes to see a negative number. Sometimes though, a combination of growth, addressable market, and industry dynamics can more than compensate for losses.
With WeWork stock, that will not be the case.
It is true that whatever happens on the IPO day or even in the ensuing weeks after the IPO is a poor indicator of future returns. One example is Facebook (NASDAQ:FB), which saw its stock down 50 percent in the first six months but has done well since then. Recent volatility aside, it has been a good investment.
However, with WeWork stock, there are obstacles to its ability to grow and generate profits. People like to claim that “this time is different.” In this particular case, it just is not.
WeWork Stock and Fantasy Metrics
What’s the solution if investors are averse to negative numbers?
Make up a new metric. When your GAAP calculation does not produce a desirable number and in the context of a volatile market, come up with something new. Creativity on Wall Street has never been better, except twenty years ago during the tech bubble. One sometimes just has to let out a laugh.
For WeWork, it is their community-adjusted EBITDA that has my eyebrows raised. It excludes expenses like marketing that are required for growth. Remember that EBITDA is meant to be a cash flow proxy, adjusting for only non-cash items. Last time I checked, normal course-of-business expenses like marketing are cash expenses. WeWork claims that this positive $467 million is the number to focus on.
Nevermind the $1.9 billion loss.
With Uber, which has been taking a lot of heat, its version is “core platform contribution profit.” They wanted investors to look at that rather than their $3 billion operating loss in the most recent fiscal year. Investors balked and chose to focus on the operating loss.
Flawed business model
WeWork started up and gained traction in the years after the financial crisis. As such, they were able to negotiate favorable rates for commercial space. Understandably, landlords were more than happy to lease out their space to WeWork given the lack of demand and competing bids at the time.
But the economy has recovered. Accordingly, commercial rents are higher. This means that the cost of doing business for WeWork is on the rise. WeWork has not gone through even a mild recession, and they are going run into difficulties if a downturn occurs. It already is a high fixed-cost business when the cash keeps coming in at the current rate, but that is an inherently dangerous assumption given how late in the business cycle the U.S. economy is in now.
The Bottom Line on WeWork Stock
CEO Adam Neumann is an incredibly charismatic salesman, but charisma can only get you so far. Look no further than Elon Musk.
“No one is investing in a co-working company worth $20 billion. That doesn’t exist,” Neumann said. “Our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.”
Energy and spirituality do not generate profits in and of themselves. Besides these “assets,” WeWork does not own anything. If the overall economic picture looks less rosy, there is nothing to sell to raise cash.
I remain skeptical on WeWork stock given the luck of timing, business model, and financial creativity.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
