A recent pre-initial public offering document filed with the Securities and Exchange Commission by We Co., formerly known as WeWork, starkly reveals a company that, despite increasing revenue, is burning through cash at an even greater rate. The disclosure document gives detailed financial information about the office subleasing real estate company that may leave many wondering whether its plans for a $3 billion to $4 billion new stock offering will be met with stiff resistance from investors.
A review of the company’s financials, as well as the disclosure of a number of insider, non-arms-lengths dealings between CEO Adam Neumann and the company, should cause investors to view the upcoming new offering with skepticism.
We’s financials paint a worrisome picture.
From 2016 through 2018, the company's revenue increased four-fold to $1.82 billion. Its annual loss also mounted to $1.61 billion. For the first half of 2019, We’s revenue more than doubled to $1.53 billion, while its loss increased slightly to $689.7 million. The loss would have been greater but for a one-time extraordinary gain of $486.2 million.
Nine years after it leased its first office building, We has yet to figure out how to turn a profit from offering tenants cozy barn-wood interiors, on-site craft beer, yoga mats and dog treats to justify the nice markups on the space it subleases.
We reported over $1.9 billion in losses — a 103% increase over 2017 — on $1.8 billion in revenue last year, which amounts to nearly 34% below the company’s own revenue estimates. It is interesting to note that competitor IWG (LSE:IWG, Financial), formerly known as Regus, by comparison, posted $140 million in net profits on revenue of $3.3 billion.
The trouble for We is that as its revenue grows, so does its losses at nearly the same rate. This direct correlation is not a promising sign. The company anticipates revenue of approximately $3 billion this year along with concomitant losses for the same amount. This would mean the company’s total accumulated losses for 2018 through 2019 would be close to $6 billion.
Then there is the question of We's sky-high valuation. In this regard, the company seems to be on the same path as money-loser tech IPO companies Uber (UBER, Financial) and Lyft (LYFT, Financial), both of which had to substantially trim their lofty and unrealistic pre-IPO valuations when they priced their new offerings. Even though SoftBank bought out some of We's early investors a few months ago, based on a $23 billion valuation, the company is currently using a pre-IPO valuation of $47 billion based on the sales proceeds from various earlier private placements.
For purposes of assessing whether $47 billion is a reasonable valuation, SoftBank attempted to structure a deal last year to buy stock from existing shareholders for $10 billion. The deal crumbled after some of SoftBank’s investors, including Saudi Arabia’s Sovereign Wealth fund, balked over concerns about We’s high valuation. Instead, the firm invested $1 billion directly in We and bought another $1 billion worth of existing shares.
Other red flags abound.
To finance its rapid expansion, We has needed to raise increasingly large sums of cash. It is estimated that the company will need roughly $8 billion to $9 billion to fund its growth until the business can turn a profit. We called its profitability picture a “managed outcome,” a term that is not only amorphous, but more importantly, pristinely undefined.
In addition to hemorrhaging cash at a rapid rate, that continues to exceed the rate of revenue growth, We plans to raise as much as $3 billion to $4 billion in the coming months through a debt deal that could eventually exceed $10 billion over the next several years. The specious argument being offered by the company for the increased debt load, which will surpass the planned proceeds from its public sale of stock, is that it will reassure investors in the upcoming IPO that the company has cash flow on hand to fund its expansion.
Yet such strategic thinking is from a money-losing company that was most recently valued at $47 billion. By comparison, We's principal competitor generated nearly twice as much revenue as the company did last year, yet its valuation is only slightly above $4 billion.
Neumann would like investors to think of We more as a tech company, rather than merely a company that leases commercial office space. But perhaps the comments of Jeff Sonnenfeld, a professor at Yale University’s School of Management, are more grounded in reality. He said, “Strip away the barn-wood interiors, bean bags and espresso bars, and (We) looks like a lot of other real estate companies.”
We's essential business model doesn’t justify its lofty valuation, nor does it offer any path to long-term profitability. In a world where corporations are increasingly looking to save costs and cut out the mark-up-middleman, We promotes itself as an extra cost.
Investors should be skeptical of how the company’s strategic business plan of building-out leased space with fancy frills like espresso bars, sophisticated high-end gyms and yoga studios, will work in an economic downturn. Many businesses are happy to spend money for bean bags and doggie treat dispensers when the economy is doing well; it is unclear whether they will continue to fork out money for fancy offices in a downturn.
Finally, there is the not insignificant issue of self-dealing by We's co-founder and CEO. Neumann has cashed out more than $700 million from the company ahead of its initial public offering, through stock sales and debt. —a highly unorthodox step, that raises questions as to how much of a stake the current CEO has in the long-term success of the company. Not only is the amount of stock liquidation staggering, it is certain to raise eyebrows as well given the insider sales occurring so close to the planned IPO
If the founder leaves the impression that he is abandoning ship, why would new investors want to come aboard the Titanic?
As noted above, there are a plethora of factors that do not bode well for We. Too much self-dealing, conflicts of interest and an inauspicious liquidation of stock by a founder immediately prior to his company’s sale of shares to the public, should cause intelligent investors to view the upcoming IPO with a very jaundiced eye.
Disclosure: I have no positions in any of the securities referenced in this article.
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