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Is the Game Up for WeWork?

You know something isn’t right when you go from a valuation of $47 billion to $10 billion in less than three months. But WeWork’s pre-IPO road show was such a shitshow that the shared-work space startup was forced to postpone its IPO out of fear that not enough suckers would participate in its public listing (Read THIS). Now Softbank, WeWork’s biggest investor ($2 billion plus) is in panic mode.

The problem with WeWork is that it can’t make money in a booming economy. And if you can’t make money now, how the fuck are you suppose to turn a profit when a recession kills the demand for office space? It takes this company about $2 to make $1 and even Donald Trump Jr. knows that’s not a sustainable business model. Then you have the corporate governance issues, which some big names in tech have described as borderline fraudulent (Read THIS, THIS and THIS).

Here’s some of the shit WeWork’s CEO Adam Neumann has done to enrich himself at the expense of the company he co-founded:

  • Took loans from WeWork and used proceeds to buy buildings, which he subsequently leased back to WeWork.
  • Hired family and friends and appointed them to key positions.
  • Directed the company to pay him $5.9 million personally in order to use the “We” trademark when it rebranded as the We Co. (WTF?)
  • Owns three classes of shares that gives him absolute control of the company. The share structure puts Mark Zuckerberg to shame.
  • He has a personal line of credit of up to $500 million from UBS, JPMorgan, and Credit Suisse (all of whom were listed as underwriters for the IPO).

But the biggest issue investors had trouble with was figuring out what WeWork was worth. What the company’s private investors were telling the public was wishful thinking at best. These guys are desperate to cash out and it doesn’t matter at whose expense as long as they make their money. This is what David Trainer had to say in his detailed analysis:

In order to justify its valuation of $47 billion, WeWork must achieve 30% NOPAT margins (similar to Boston Properties) and grow revenue by 30% compounded annually for the next nine years…Even if WeWork achieves the same margins but grows revenue by 20% compounded annually instead of 30%, the company is worth just $12.6 billion today, a 73% downside to the current private market valuation.

Even that scenario seems too optimistic. It’s much more likely that when a recession hits, WeWork will collapse under the weight of its massive operating lease obligations, which increased from $34 billion to $47 billion in just the first six months of 2019.

Trainer believes IWG (International Workplace Group) is actually worth more than WeWork.

IWG has more square feet of office space than WeWork, earns more revenue, and actually earns a profit. However, IWG has a market cap of just $3.7 billion, less than 10% of WeWork’s most recent valuation. The primary difference between the two is that WeWork describes its business model in the faux-tech lingo of “space-as-a-service” and its mission as “elevating the world’s consciousness.”

Space-as-service? Maybe that’s why Larry Ellison thinks WeWork is worthless. Where is the scalability? Where are the software gross margins? But none of this will matter if these guys can raise more money. So maybe, just maybe, public investors won’t have to subsidize these assholes.

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