Maybe I would buy WeWork’s initial public offering — if I could pay in other people’s bitcoin.
Other than that, I just don’t get it. The buzz Wednesday is about the IPO filing by WeWork — formally, The We Co. WE, +0.00%, renter of flexibly shared office spaces, mostly to freelancers and small businesses — and a lot of it isn’t kind. Reading the 350-page prospectus, it’s not hard to see why.
WeWork loses a ton of money: $904.7 million in the first half of this year. Granting the company the customary argument that non-cash expenses shouldn’t count against startups, it still lost $176.7 million last year in operating cash flow too, after making a cash-flow profit in 2017. Its key metrics, especially gross profit as a percentage of sales and its spending on sales and administration as a percentage of sales, aren’t improving fast enough. Expenses of running its offices are a declining percentage of sales — growth companies work when they can accomplish that — but marketing and overhead expenses are all but wiping out the gains.
Most perplexing of all is the question that has always followed New York-based WeWork: Why is it valued like a technology company, when it is quite plainly a real estate company?
The question matters because the numbers on this deal are likely to be huge — on a scale with Lyft LYFT, -6.01% and Uber Technologies UBER, -7.05%, two 2019 IPOs now trading well below their offering prices. As recently as January, venture capitalists putting in fresh money valued WeWork at $47 billion, according to TechCrunch. CEO Adam Neumann’s stock options vest at valuations ranging from $50 billion to $90 billion.
All this for a company that had $1.8 billion in sales last year, and whose run rate for this year is only $3.3 billion.
Meaning, the baseline on this puppy is 15 times this year’s sales, with non-existent earnings and more than $2 billion in negative free cash flow as it invests heavily in building new shared work spaces to rent out. And WeWork has no clear path to anything like the $2.5 billion in yearly profit that would be required to make its shares comparably priced, at a $50 billion valuation, with real estate investment trusts that lease offices to other companies. Brett Arends notably tore this apart last month.
Which, stripped to essentials, is WeWork’s real business.
Utopian vision
Like Uber and Lyft, WeWork begins with a romance story about the changing nature of work, and our utopian progression from the shackles of owning a car (in Uber’s case, and especially Lyft’s, because Lyft sold that story harder) or your own office space to flexibly renting the same thing.
Alas, the stats say no.
The percentage of Americans who are self-employed, WeWork’s core audience — is declining, not growing. The Labor Department says the percentage of self-employed people in the workforce has been falling for 20 years, to 10% in 2015 from 12% in 1994.
So if your idea is that, like Uber and Lyft, WeWork is going to ride a wave of people changing the very nature of their employment patterns the way crypto fans claim they’re changing money, you need a new idea.
To counter that, WeWork tells a story in its IPO filing that it’s wooing corporate clients, but don’t bet hard on that, either.
Tiny market
The filing offers up numbers that are in tension. WeWork would like investors to pay attention to the fact that 38% of Global Fortune 500 companies are now its clients, and 40% of its memberships, or rented seats, are sold to companies with 500 or more employees.
The set of numbers that matters is this one. WeWork has 604,000 work stations, doubling in the past year. And it has 527,000 members. The numbers tell you that each customer takes only a handful of seats.
In other words, the revolution isn’t really happening, just some dabbling and experimentation. Even though WeWork says its solution is much cheaper than renting other office space, it only has a 0.2% share of the market in its 280 target cities. No one is committing, either: WeWork’s contract backlog is only $4 billion, a little more than this year’s revenue. And half of U.S. sales come from just five cities.
A pessimist might say WeWork is a trend business that only works in a handful of trendy towns, notably San Francisco and New York. And that its customers make only minor commitments to its model.
An optimist would say this also gives WeWork opportunity. At a $5 billion or even $15 billion valuation, that would be true.
But it will take several years to generate $50 billion of value, let alone $90 billion, even if all goes well. At 50, its sales multiple would be double Facebook’s FB, -4.45% and four times that of Amazon.com AMZN, -3.34%, the cloud-computing leader whose idea of migrating key corporate overhead (computing in Amazon’s case, offices in WeWork’s) makes it a decent, if imperfect, comparable. Uber also gets four times sales.
I’m all for story stocks — just not this one.
A good story stock is one that has taken over a good bit of its market before it asks for public investors’ money at big valuations — certainly more than 0.2%. And its financials should be inflecting for the better, in ways WeWork overall numbers aren’t.
Tim Mullaney is a MarketWatch columnist.