Update 9/16/19: Latest reports say WeWork is considering delaying its IPO until next month at the earliest, and maybe until next year.
It’s hard to think of a recent IPO that has garnered as much bad press as The We Company, better known as flexible office space provider WeWork. And it hasn’t even launched yet.
For contrarians like me, poor headlines are not necessarily a reason to keep away from an IPO (or a stock). All that negativity can sometimes translate into a bargain buying opportunity.
Yet the reality here is the majority of investors are going to remain extremely cautious about backing the WeWork story, whatever the price.
The deal has zero momentum heading into its possible launch tomorrow, though there is a faint hope the cut-price valuation lures in some meaningful interest.
As you might have read once or twice, there are big reservations about WeWork’s business model, including that its growth depends on entering into more long-term leases (with the associated long-term liabilities) or buying real estate, both requiring WeWork to come up with billions more in cash with no guarantee it will turn a profit.
I have heard some sources suggest the business, which charges entrepreneurs a membership fee rather than rent to use its space, could become profitable in just a few years if it slowed down its growth rate.
But it’s a Catch-22 situation because without growth investors are unlikely to be much interested in paying up for the stock. And WeWork starts to look more like a boring REIT than a sexy technology company (which it is not, but anyway).
There is also the awkward timing of the deal and how WeWork would fare in a recession. WeWork’s members are highly sensitive to any change in economic (and financing conditions), plus start-ups can find cheaper alternatives if they are feeling the pinch (after all, WeWork is all about flexible use of space).
Then there’s the potential for commercial landlords to essentially copy the WeWork model to deal with their vacant space.
Still, investors should reserve judgment until they see the valuation, which is only revealed at the launch of the offering.
That is supposed to happen tomorrow (Monday) morning, which means the official roadshow will begin (with the release of a slick online version for retail investors) and the IPO probably price on September 25 or thereabouts ahead of the stock’s Nasdaq debut the next day.
Of course, a late change of plans is always possible, especially as investors might be facing a volatile week after the troubling events in Saudi Arabia over the weekend (production disruptions from a drone strike on the country’s oil facilities). So really nothing is going right for WeWork and its 40-year-old founder Adam Neumann.
In recent weeks, WeWork’s purported valuation (market capitalization or enterprise value we are not sure) has reportedly come down on several occasions to just $10bn from more than $20bn and versus the last private financing round at $47bn (not a real number to be fair but we won’t go into that).
The company has made a series of corporate governance concessions as well, including reducing the number of votes attached to Neumann’s supervoting shares. Not to diminish the importance of corporate governance, but generally it is not a huge consideration for investors in tech IPOs because they tend to be more focused on the growth prospects of the company concerned.
WeWork’s biggest supporter, Japan’s SoftBank, is expected to take $750m of the shares in the offering. Its name is bound to be emblazoned on the cover of the IPO filing to highlight its show of support.
As embarrassing as it is for SoftBank to be averaging down from its previous pre-IPO investment at a $47bn valuation, this anchor order will leave less stock for others.
Without SoftBank, WeWork would be selling 30% of the company at the IPO – it has to raise $3bn in order to also secure $6bn in debt from the banks – yet this is far larger than the 10%-15% free float on hot tech IPOs (tight supply and excess demand is one of the reasons they often surge massively on debut).
SoftBank’s enthusiastic backing is a small positive, but a positive nonetheless (worth watching if the stake is locked up for six months or a year).
At $10bn, WeWork will be coming to public markets at a significant discount on an EV/sales basis to Uber (roughly 3x-4x 2019 sales of around $3bn at the current growth rate versus 4.5x for Uber). WeWork’s underwriters clearly figure some will find WeWork irresistible at these levels, but the risk is they will be hedge funds rather than long-only/long-term investors, increasing the chances of a calamity on debut.
