WeWork's long-awaited S-1 filing arrived at a potentially challenging moment.
Fresh recession fears sent the market tumbling on Wednesday, with the Dow Jones closing 800 points lower as signals from the bond market sparked concerns about a looming global downturn. In the meantime, investors haven't exactly embraced some growth firms that, like WeWork (now rebranded to The We Company), burn enormous sums of money in chasing "economies of scale" -- meaning they must achieve a certain size and reach in order to ever turn a profit.
Uber (UBER) - Get Report closed at an all-time low of $33.96 on Wednesday days after posting lower-than-expected revenue and a wider loss compared to the year-ago quarter. Lyft (LYFT) - Get Report shares have lost about 25% of their value since its March IPO, including a 7% tumble on Wednesday after it revealed that its IPO lock-up period is ending early.
While Uber and Lyft make for an imperfect parallel to We Company, which offers flexible office space, comparisons are inevitable given the sky-high private valuations assigned to each along with uncertain profitability prospects.
The Prime Unicorn Index, which tracks highly-valued private companies, places WeWork's valuation at $49 billion based on its last round of equity fundraising in February 2019. That deal, led by Softbank, offered a preferred price per share of $110 -- a jump from a prior share price of $58 in late 2017.
Can that valuation continue growing forever?
"Commercial real estate is a very sticky and fragmented market filled with long-term leases and an eclectic mix of customer demands, meaning that WeWork's addressable market may be smaller and more difficult for the company to penetrate than some give it credit for," said DJ Kang of the personal finance site ValueChampion.
In its S-1 filing, WeWork disclosed a net loss of $1.61 billion, or $9.87 a share, in 2018. That figure is nearly double the loss of $883.9 million, or $5.54 a share, it posted in the prior year. For the first six months of 2019, the company disclosed that it lost $689.7 million, or $4.15 a share.
The company suggested that it's well on its way to achieving the scale necessary to turn those losses into a profit.
"Our membership base has grown by over 100% every year since 2014. It took us more than seven years to achieve $1 billion of run-rate revenue, but only one additional year to reach $2 billion of run-rate revenue and just six months to reach $3 billion of run-rate revenue," the We Company wrote in the filing.
WeWork has trends and attributes working in its favor -- it is a well-recognized brand name, and the largest player by total space leased, according to Colliers International, in a growing market for flexible office space. But the lofty valuation implies that WeWork achieving the necessary scale is all but a sure bet, added Kang.
"In fact, they are so large that the company may have to grow its business by 10-20x before it starts to generate some profit," he said, calling that possibility "highly premature and speculative."
What about that potential looming downturn -- is WeWork's capital-intensive model likely to hold up?
"Given the short history and lack of track record of this new industry, no one can say for sure," wrote Colliers' Andrew Nelson and Ron Zappile in a recent report. "But their business model of generally short tenant leases and a tenant base heavy in individual entrepreneurs and small, thinly-capitalized start-ups, would seem to make for a more volatile cash flow in the event of a recession, compared to traditional landlords who opt for longer lease terms with higher-credit firms who are better positioned ride out the downturn."
WeWork's untested business model isn't the only potential red flag for investors in the run-up to its expected fall IPO. Weeks ago, WeWork's founder and CEO Adam Neumann raised eyebrows by cashing out $700 million in a mix of stock sales and loans secured using his equity, a highly unusual move for a founder preparing for an IPO.