The We Co., the parent company of co-working giant WeWork, has seen its star fade in record time.
Planning to go public in September, WeWork aimed to make a splash. Unfortunately, investors proved to be less than enthusiastic about the prospect. As a result, the company scrambled to drum up interest by driving down its proposed valuation, but even these efforts failed to garner the desired response.
As we opined in a research note earlier this month, it seemed likely that WeWork might decided to pull the plug on its initial public offering. On Sep. 16, We did just that.
Valuation goes into reverse
WeWork has seen an incredible rise in its valuation over the past several years as it has burned cash at an incredible rate in order to sustain breakneck growth. The company’s private backers have consistently boosted its valuation. In June 2015, WeWork was valued at $10 billion. Less than four years later, the company was valued at $47 billion.
WeWork initially hoped for an IPO valuation of $47 billion, the same valuation it garnered during its most recent private funding round in January. However, public market investors proved far more skeptical. It quickly became apparent that $47 billion would be impossible to achieve.
Desperate to prevent its IPO from failing, WeWork announced a series of valuation cuts. On Sep. 5, it set a new IPO price range that implied a valuation between $20 billion and $30 billion. Cutting a valuation virtually in half is a drastic measure by any definition, yet it was still not enough. With investors still giving it the cold shoulder, WeWork cut its valuation even further. On Sep. 13, Reuters reported that WeWork was considering a valuation as low as $10 billion.
A wounded unicorn
Ultimately, WeWork’s efforts to salvage its floundering IPO came to naught. On Sep. 16, the company announced it would not go public this month:
“The We Company is looking forward to our upcoming IPO, which we expect to be completed by the end of the year. We want to thank all of our employees, members and partners for their ongoing commitment.”
Some commentators and investors have suggested WeWork’s pre-IPO meltdown may signal the end of the rampantly overvalued unicorn companies that have proliferated in recent years. Yet, as Bloomberg reported, the company’s IPO flop is likely to be viewed more as an aberration than as a sign of a broader market shift against overvalued, money-losing IPOs:
“If the WeWork IPO flops, technologists will try to dismiss it as an outlier, the bad fortune of a real estate startup that was never truly a tech company. It will be viewed not as an indictment of current excess in Silicon Valley, but as an exception to it. That’s not realistic, but then again, neither are unicorns.”
Financial reality sets in too soon
The fact WeWork is a veritable cash-incinerator was not immediately disqualifying. Given the proliferation of tech and growth stock IPOs in recent years, it is hardly unusual for a company to go public before achieving profitability. Tapping public markets has been a critical tool for many young companies to bring in fresh capital to supercharge growth.
Lyft Inc. (LYFT, Financial), a ride-sharing company that went public earlier this year, had its IPO oversubscribed within just a couple days of hitting the road. Of course, Lyft’s valuation has taken a beating in the months since, as financial reality has set in. WeWork appears to have caught the unlucky break of being forced to contend with financial reality before it has the chance to go public.
Investors can see that, despite WeWork’s impressive top-line growth, there are few signs of this growth translating meaningfully to the bottom line. In 2018, revenue grew to $1.8 billion, double what it was the year prior, but operating costs alone ran to $1.5 billion. In other words, profit margins are extremely thin even under nearly ideal circumstances.
Unsurprisingly, these dubious financials have led many investors to question WeWork’s business model.
Verdict
WeWork needs to go public in order to raise billions of dollars. Private markets cannot continue to feed its insatiable hunger for cash indefinitely. While its plan to issue junk bonds may help to plug the financial gap for a while, eventually the company will have to decide between taking the plunge into the stock market or collapse under the weight of vast and growing liabilities.
Postponing its IPO does little good for WeWork, other than delaying the inevitable reckoning. Given macroeconomic uncertainty, delaying will likely only serve to weaken WeWork’s balance sheet, even as volatility mounts.
Time will not cure WeWork’s wounds.
Disclosure: No positions.
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