News broke Friday that WeWork, now known as The We Company, is seeing such lackluster results from its roadshow that it may call off its IPO.
This is great news except for short-sellers, who were likely rubbing their greedy little hands together at the prospect of shorting this honey trap stock.
IPO Valuation Was Ridiculous
WeWork was initially looking at a $50 billion IPO valuation. The stock market has become accustomed to ridiculous unicorn valuations, so at first, it didn’t seem like anyone cared that WeWork had lost $2 billion in its most recent year of operations.
Yet now that the Uber and Lyft IPOs have flopped, the stock market is suddenly more wary.
And well it should be. The WeWork business model is a complete disaster. All the company does is spend an enormous amount of money, almost entirely funded by debt, to lease high-end spaces in a few important major cities.
It then renovates the spaces, turns them into luxury-filled community workspaces, and then micro-subleases the space desk-by-desk and room-by-room.
On its own, this could be a very lucrative business model. In a way, it’s like a micro-timeshare.
But there’s a critical difference. Timeshares are sold to people for the long term. Many of those sales are already completed before the timeshare is even built. So the operator already knows they’re going to have the cash flow to pay the mortgage.
Business Model Is too Risky
That’s not the case with WeWork. Space is rented by the day and even by the hour. Not only that, but the company is targeting younger people who don’t necessarily have enough disposable income for a shared workspace to be something they use all the time.
Yet even renting to business clients has its challenges because there is a tremendous amount of competition.
Do a Google search for “Regus offices,” and you’ll find exponentially more space available, some with the same amenities as WeWork, at competitive prices.
Regus is profitable, making $171 million last year.
It’s owned by IWG, a Belgian company, and not only makes more revenue than WeWork, but it has more square feet of office space.
WeWork has 45 million square feet of space versus IWG, which has 57 million. But the former only generated $1.8 billion in revenue last year while IWG pulled in $2.8 billion.
IWG wins the unit revenue battle also, coming in at $49/sq. ft. vs $40/sq. ft. for WeWork.
But here’s the kicker. IWG’s market cap is only $3.7 billion.
WeWork and CEO Adam Neumann have apparently figured this out. The IPO price was dropped to imply a valuation of between $20 million and $30 billion – which is still 6x more than IWG’s.
Let’s Talk About That Wacky CEO
There are so many other problems with Adam Neumann and WeWork.
For starters, the company leases much of its space from Adam Neumann himself. That kind of self-dealing is unacceptable, and it’s incredibly stupid for investors to get involved at all.
WeWork’s strategy has been to position itself as being a fun place to work, harnessing the energy of community, and getting people to connect with each other. That’s all well and good, but that’s not the business.
In fact, that sounds a lot more like a social club that’s being sold on an hourly or daily basis.
IWG has offices in 1,000 cities around the world. WeWork has offices in 111, most of which are in just seven.
WeWork’s average lease term is 15 years, which means plenty of time for a recession to destroy the company.