The We Work IPO. Looks Like 2000 All Over Again.

Adam Neumann at TechCrunch Disrupt NY 2015. Wiki Commons. Used with permission.

We’ve had a series of Initial Public Offerings lately that would have been better labeled as Insider Liquidity Events. We Work is another in a long series of these, which makes 2019 IPOs look a lot like 2000 all over again.

The revenue growth of the We Company is amazing. Sales doubled in 2018 over 2017 and look on track to do that again in 2019. That is as long as the economy doesn’t start weakening (which it is predicted to do). The cash burn and net losses are eyepopping, at $1.9 billion in 2018 and $905 million in the first six months of 2019. Some of the success stories are inspiring, like the fact that Bird Co. launched out of a WeWork shop in Santa Monica, California. Karlie Kloss’ Coding Camp partners with WeWork to inspire teen girls to enter the technology industry. So, the company is indeed bringing a culture and community to office space in a way that companies like Boston Properties and other commercial REITs haven’t.

However, the business model itself is troubling. The We Company isn’t a real estate company. In fact, WeWork’s co-founder and CEO buys real estate and leases it back to The We Company. The We Company enters into long-term lease contracts (15-years or more) with Adam Neumann (and others), but banks its own business upon short-term commitments from small and mid-size businesses. This becomes even more troubling when you consider the amount of credit card debt that is held by Americans, many of who are launching their hobby on a dream with high-interest debt. Consumer credit card debt in the U.S. is $870 million. Small companies in the U.S. are so rife with cash negative operations that Charles Schwab’s Chief Investment Strategist Liz Ann Sonders has an underweight on this area of the marketplace.   

WeWork promotes CEO Adam Neumann as a guru celebrity, in the same way that Apple and Facebook have capitalized upon in the past. Founder CEOs like Jobs and Zuckerberg cement the promise that visionary disrupters are best left unencumbered and highly empowered to lead the company to greatness. However, opportunist founders, like Marc Pincus and Eric Lefkofsky, who cashed out hundreds of millions before the Zynga and Groupon IPOs (respectively) give the idea a black eye. Which type of founder/CEO is Adam Neumann?
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Although the We Company S-1 filing claims that “the last time Adam sold any shares was October of 2017,” there has been a lot of borrowing against shares to purchase real estate, some of which is then leased back to The We Company. The Wall Street Journal reported on July 18, 2019 that Adam Neumann has cashed out $700 million in stock and loans pre-IPO. If this is true, then Neumann has cashed out far more than Pincus or Lefkofsky before him. (The We Company did not respond to an email requesting additional information on The Wall Street Journal claims.) As you can see in the chart below, companies that launch IPOs while their business is still cash negative haven’t been faring very well on Wall Street.

Chart by Natalie Pace. (c) 2019. All rights reserved.

Companies that launch their IPOs once the business is profitable fare far better. Beyond Meat is the exception of a company that was cash negative, but has had an amazing run-up this year, post IPO. ​

Chart by Natalie Pace. (c) 2019. All rights reserved.

With the sole exception of Zoom Video this year (and Google in 2004), the other eight IPOs listed above were cash negative when the company went public. Uber reported a 2nd quarter 2019 net loss of $5.2 billion. The We Company (WeWork) has been cash negative at least since 2016 (the earliest date reported on its IPO filing). The losses in 2018 were $1.9 billion, with $905 million lost so far in the first half of 2019. It’s easy to see the correlation between profitability and IPO success in the above charts.Here is how WeWorks fares compared to Google, when lining up management, business model, first mover advantage, disruption, etc. 

Chart by Natalie Pace. (c) 2019. All rights reserved.

Click 
The We Company IPO joins a long list of companies trying to turn paper profits into cash on your dime, now, while the stock markets are still nice and high. (It’s difficult to launch an IPO during a recession.) Although the company’s mission/vision is touchy-feely new-agey (the annual summer camp featured Deepak Chopra), the age-old idea of a beneficent dictator appears to be more in play. Neumann holds all of the voting power, has cashed in big-time on a cash-negative company and doesn’t have enough experienced executives in the C-suite to pivot into profitability when the economic storms hit and venture capital becomes more difficult to access. Additionally, the We Company is grossly overvalued compared to its competitor IWC Plc (based out of London), which is currently profitable and paying dividends.
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So, the long and short of an investment in WE at this time is that it really doesn’t add up (IMHO).
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