Last week, the Wall Street Journal and other papers reported that WeWork aims to go public in September, quite a bit sooner than anticipated. The company prides itself in being the largest provider of flexible work space in the world with 466,000 members renting space in 563 locations in 100 cities in the world. Founded only in 2010, WeWork today is the largest tenant in Manhattan and the second largest tenant in London (behind the British government).
Even though it is essentially a property company, it has all the hallmarks of an overhyped tech company:
A charismatic founder, Adam Neumann, who has become a kind of media star with his promises to change the world.
A fast-growing business (the company rose from 1,000 employees three years ago to more than 12,000 today) that spends money faster than it earns it. In 2018, the company managed to lose $1.9 billion with revenues of just $1.8 billion.
Pretentious naming of business units. At the beginning of the year, the company renamed itself to We Company and launched two additional business units next to We Work. WeLive offers furnished apartments for young professionals in Manhattan who want to live near their offices on Wall Street and WeGrow is an education business that so far runs an elementary school and an IT academy.
Sky-high pre-IPO valuations after the company sold a stake to Softbank Group putting the valuation of the business at $47 billion. An earlier sale of employee stakes in the company to Softbank was done at lower valuations of $23 billion providing a blended valuation of the shares sold to the group at $36 billion.
But the problem for WeWork is that it simply isn’t a technology company, but a property company and that means that a price/sales-ratio of 26 (or 20 if we take the blended valuation) is certainly not in line with any of its peers. And unlike other high-flying technology companies like Tesla or Uber, WeWork can’t really claim to have no comparison in the market – because it has.
IWG plc (formerly Regus) was founded in 1989 by Mark Dixon and is in exactly the same business as WeWork. It provides flexible office workspace, meeting rooms, video conferencing services and coworking spaces to tenants all over the world. In fact, IWG is similar in size to WeWork. It has about 3,300 locations in more than 1,100 cities around the world, employs about 10,000 people and in 2018 managed to generate £2.5 billion ($3.1 billion). The differences start, however, if we look at the bottom line. Unlike WeWork, IWG was profitable and generated net income after taxes of £105.7 million ($131.8 million). And the company has been profitable for years – at least since the US business emerged from bankruptcy protection.
Yes, you heard that right. Regus filed for Chapter 11 bankruptcy protection for its US business in 2003 because the company was one of the darlings of the tech bubble in the late 1990s. During that time, Regus grew rapidly and achieved similarly lofty valuations as WeWork does today. Yet, with the end of the tech bubble and the onset of the recession it all came crushing down and investors lost almost all their money. Today, IWG is a solidly managed company with a market cap of £3.6 billion ($4.5 billion) and a price/sales-ratio of 0.7.
But today, we have a new generation of investors who obviously have never heard of IWG and are making the same mistakes that investors of my generation made with Regus two decades ago. That gives us the opportunity to get a rough estimate about the “fair value” of WeWork. Let’s assume that IWG can serve as a comparable due to its similar size and revenues and its identical business model. Unlike WeWork, IWG is profitable so it should trade at a higher price/sales-ratio, but then again, WeWork grows faster and thus may be valued at a higher multiple. If we assume a price/sales-ratio of 0.7 for WeWork (the same as for IWG) and annual sales of $1.8 billion, then the market cap of WeWork should be $1.26 billion, or 97% below the $47 billion valuation of the company with the latest capital increase.
You can argue with me about the crude nature of this comparison until you are blue in the face. The point is that there is enough margin of safety in these numbers to tell me that I will not touch WeWork with a 10-foot pole. This investment is never going to work out.
In fact, it seems as if the employees of WeWork are increasingly aware of this. The oh so charismatic Adam Neumann has allegedly cashed out $700 million by selling some of his shares in WeWork to Softbank and other investors and taking out loans against his remaining shares. WeWork says that the fact that Neumann has borrowed against his shares proves his confidence in it, but I would interpret this differently. Apparently, he used the proceeds of the loans to invest in property himself, some of which he rents out to WeWork again. This way, he not only benefits from the company through the appreciation of its shares but also through the income it pays to rent some of his property. And should it all go bust, he will always have the real asset while investors in his company will be stuck with a lot of hopes and dreams and some fancy named businesses.
Share price of IWG plc