It’s been a humdinger of a year when it comes to IPOs. None has taken as much abuse as the WeWork IPO.
Is it a real estate company? Is it a temporary office provider? What exactly is WeWork and why is it so ridiculed?
I first became aware of WeWork in October 2017 when it announced it was buying Lord & Taylor’s flagship location in New York City for $850 million. At first, Hudson’s Bay (OTCMKTS:HBAYF), Lord & Taylor’s parent, was going to keep 150,000 of the iconic department store’s 676,000 square feet of space, with WeWork using the rest for office rentals.
Ultimately, Hudson’s Bay decided to abandon its plans to maintain a store on Fifth Avenue. The decision gave WeWork even more space to rent out.
Flash forward to August 2019 and Amazon (NASDAQ:AMZN) is contemplating renting the entire 12 floors from WeWork. In negotiations with the soon-to-be public company, Amazon might also rent just a portion of the building, opting to find additional space elsewhere.
Whatever happens, WeWork could use a little positive PR. With or without Amazon, the WeWork IPO is going to be a stinker. Here are seven reasons why.
WeWork Loses a Lot of Money
In the past three years, WeWork has lost $2.9 billion on $3.1 billion in revenue. That means for every dollar of sales; it loses 94 cents. That’s hardly a pathway to profitability or a good sign for the WeWork IPO.
What’s worse is the fact that over these three years, WeWork’s location operating expenses have increased by 251% from $433.2 million in 2016 to $1.8 billion in 2018.
What are location operating expenses?
“‘Location operating expenses’ are our largest category of expenses and represent the costs associated with servicing members at our locations. These expenses consist primarily of lease costs (including non-cash GAAP straight-line lease cost), core operating expenses (such as utilities and internet), expenses associated with ongoing repairs and maintenance and the costs of supporting a dynamic community in our locations,” states its S-1.
Some analysts believe Uber may never make money, which means WeWork has got its work cut out for it.
The WeWork IPO Already Has a Nosebleed Valuation
WeWork got its start in early 2010, opening its first location at 154 Grand Street in New York City. Since then, it’s added 527 locations in 110 cities and 28 countries, making it a global business in just nine years.
In 2009, thanks to its Series A funding, WeWork had a valuation of $97 million before it ever opened its doors. Two years later, after getting Series C funding, it was worth $4.8 billion. In January 2019, WeWork received $6 billion from Japan’s SoftBank Group (OTCMKTS:SFTBF), which upped the valuation to $47 billion or 26 times sales.
What stock can you buy for a lower P/S ratio? How about Amazon for just 3.6 times sales. And it’s got $22 billion in free cash flow over the trailing 12 months. In contrast, WeWork had a negative free cash flow of $1.1 billion in the six months ended June 30.
Who knew that Amazon could appear downright cheap next to WeWork? Heck, you can get Uber for just 4.8 times sales. And the WeWork IPO is expected to raise about $3.5 billion more.
On the valuation alone, investors should avoid the WeWork IPO.
Adam Neumann Better Not Get Hit By a Bus
WeWork’s S-1 mentions the word “Adam” 169 times amongst its 220 pages of text. That’s CEO and co-founder Adam Neumann. By comparison, there are only 20 examples of “Rebekah,” Neumann’s wife and co-founder.
Neumann is tied at the hip to WeWork. Without him, it appears there would be no company.
The Financial Times has done an excellent job in its observations of the WeWork S-1, especially those that relate to Neumann personally.
For one, Neumann has a line of credit for $500 million with three banks, all of whom are connected to the WeWork IPO. Of the line of credit, Neumann’s drawn on $380 million of it. Some of his WeWork shares secure the line of credit.
Also, J.P. Morgan (NYSE:JPM), who are up to their eyeballs involved in WeWork, have lent Neumann $98 million and $800 million in loans for the company as part of a $6 billion loan package to keep WeWork growing.
If Neumann gets hit by a bus, Jamie Dimon’s going to have a cow.
After all, without the Neumann family involvement, WeWork’s merely a company renting office space.
The WeWork IPO Has a Three-Class Share Structure
Investors concerned about corporate governance will not like WeWork’s share structure.
You’ve heard of dual-class share structures. Those evil share structures that give a founder complete control over a multi-billion-dollar business without actually owning 51% of the equity.
Well, WeWork comes to the IPO table with a three-class share structure.
Those buying stock in the IPO will get Class A common stock that comes with one vote per share. WeWork’s existing shareholders will come to the IPO with Class A, Class B, and Class C stock. The Class B and C come with 20 votes per share.
Adam Neumann has 2.4 million Class A shares, 112.5 million Class B, and 1.1 million Class C shares. By comparison, SoftBank has 114 million Class A shares. This means that even though it has about the same equity as Neumann, the CEO will have 20 times the votes, easily controlling the business.
Worse still, the IPO investors are getting shares in a holding company rather than directly in We Company MC LLC, which means they have to share the profits with Neumann and other early investors.
According to Fortune, this means that Neumann will pay individual income tax rates on profits while IPO investors will pay U.S. corporate taxes plus personal taxes on dividends.
“This is another move that enriches insiders,” said Matthew Kennedy, Senior IPO Market Strategist at Renaissance Capital. “Up-C creates a tax shield, and insiders are taking that benefit for themselves. So the cash savings that the company would have had are gone, and We Co. will, therefore, be making higher payments to the IRS.”
So, not only does Neumann get control by the unusual share structure, but he also benefits more than the WeWork IPO investors dumb enough to buy shares.
Softbank Owns a Chunk of Wework
The tech industry loves to throw out the name SoftBank whenever innovation and disruption is the subject of the day.
If you don’t know who SoftBank is, it’s the people behind Sprint (NYSE:S), the wireless company so poorly run that it’s been forced to merge with T-Mobile (NASDAQ:TMUS) to survive. Despite the FCC Chair’s thumbs up for the merger, it still might not get the go-ahead.
Money Week’s John Stepek recently had some choice words for both SoftBank and WeWork. It’s worth a read.
“My view — and it is just a view, and I realise I’ve been keen to call the “IPO at the top” of this cycle — is that if WeWork manages to list, then there’s a very good chance that we really have reached the top and that a bear market will begin shortly afterwards,” Stepek wrote August 19.
Stepek views SoftBank as the anti-Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), a telecom company that’s turned itself into a venture capital company that will also lend money to its employees to invest in its startup businesses like WeWork.
With a significant investment in WeWork, Son better hope 2000 doesn’t repeat itself, because if it does, he’ll be in the dustbin of history once more.
WeWork Is Stuck in Expensive Lease Agreements
The company’s lease payment obligations were $47.2 billion at the end of June, 39% higher than at the end of 2018. If you invest in retail companies, you’re probably familiar with these obligations. They’re not quite long-term debt but liabilities nonetheless.
While the obligations represent potential future revenue as WeWork adds individual and corporate members interested in accessing its office space, the members have the ability to up and leave while the company remains on the hook for the entire leased space.
That’s a fixed cost that it can’t escape while its membership revenues are variable.
“That mismatch can be deadly in a recession,” Renaissance Capital’s Kathleen Smith said recently. “It means the company has got to be able to pay the lease costs. If for some reason there’s price pressure, lack of renewals, cancellations and they have a time where they’re not leasing out their space, that could be a very huge risk in a recession.”
Considering some believe a recession could come as early as 2020, this is a considerable risk to WeWork’s future valuation.
WeWork Can’t Get Its Own Name Straight
WeWork changed its name in January to The We Company so that it could expand beyond its role of renting commercial office space. It wants to become the center of its members’ universe.
In addition to WeWork, The We Company provides other offerings including WeGrow (schools), WeLive (hotels and apartments), Meetup (connecting people with shared interests online to meet offline), Flatiron School (online software programming classes), Conductor (marketing services software company), and Managed by Q (office management).
I don’t think anyone will argue that creating a holding company makes sense given all the different pies it’s got itself into. However, it made its name as WeWork. It ought to retain that name.
The We Company makes far less sense than something like WeWork Enterprises. Then again, the WeWork IPO makes little sense, so changing its name to The We Company is par for the course.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.