In a confidential filing this week, WeWork (or The We Company, as it now wishes to be called) surprised the market with plans to go public. The co-working space giant is targeting a valuation of $47 billion, equal to its most recent private funding round.
Private investors have bid WeWork’s valuation to truly ridiculous levels. We do not expect the public markets to be nearly so generous.
Desperate for cash
WeWork has relied on an intense cash burn rate to fuel its aggressive growth. This has led to the company posting staggering losses in recent years. In 2017, WeWork posted a net loss of $933 million, but only brought in $866 million in revenue. The ocean of red got even deeper in 2018, with the company posting a whopping $1.9 billion net loss on $1.8 billion in revenue.
The losses are not likely to end soon, if they ever do. In fact, according research by Sanford C. Berstein & Co., the burn rate is set escalate. Bernstein analysts predict cash burn of $4 billion in 2019 and $5 billion in 2020. The analysts estimate that WeWork will require $19.7 billion in external financing through 2026. With roughly $6 billion on its balance sheet in the first quarter, the company will need to pull in a whole lot more capital if it hopes to keep the music going past mid-2020.
In need of a new sugar daddy
To date, WeWork has been able to tap private investors to fund its cash-hungry operations. The company has been a major beneficiary of the vast funds that have flowed into venture capital and private equity in recent years. The dry powder accumulating at these private investment firms has pushed them to find bigger deals, and has made them willing to countenance seemingly absurd valuations.
WeWork’s principal benefactor is SoftBank Group Corp. (TSE:9984) and its $100 billion Vision Fund, which have poured more than $8 billion into the company. In late 2018, SoftBank announced its intention to take a controlling stake in WeWork, a deal that would involve injecting another $15 billion into the company. Major Vision Fund backers balked at the notion, forcing SoftBank to reverse course.
With SoftBank’s easy money now drying up, WeWork needs new backers to fund its growth. The public market may now be its only viable option.
A sinking ship
Some current investors have seen the writing on the wall and headed for the exit. The last funding round, a $2 billion infusion from SoftBank, ended up being as much about providing exit opportunities as it was about providing new operating cash. About $1 billion of the round was earmarked for letting investors and employees cash out.
While venture capital funds have been content to post paper gains from successive up-rounds, the public market is likely to take a more critical view of WeWork’s valuation. Most current holders will likely take the opportunity provided by an initial public offering to abandon ship rather than hold onto a stock poised for years of punishing dilution and limited prospect of future profitability.
Verdict
In a previous research note, we lamented that we would likely never get the opportunity to short WeWork, since the growth story was already coming off the rails. With an IPO now set for December, it looks like we will get the chance after all.
WeWork is a cash-incinerating company with no prospect of ever becoming meaningfully profitable. Strangely enough, CEO Adam Neumann has actually acknowledged the absurdity of his company’s valuation by conventional financial metrics. Instead, he suggests that investors should value the company based on its “energy and spirituality” rather than anything so mundane as a revenue or earnings multiple.
Neumann’s shtick has played well with his well-heeled Silicon Valley backers thus far. That will not play with Wall Street analysts, few of whom will be sold on the notion of using spiritual energy as an alternative metric to financials. WeWork’s valuation is set to implode upon contact with public market scrutiny.
Disclosure: No positions.
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