The strangest and most alarming things in WeWork’s IPO filing

WeWork’s parent company, the We Company, made a splash earlier this week with the release of its much-anticipated IPO prospectus.

The company’s S-1 lays the groundwork for what is widely expected to be one of the largest initial public offerings of the year, second only to Uber’s IPO in May.

It’s also filled with unusual items that should scare off all but the hardiest investors with a healthy appetite for risk. Here’s a rundown…

Mounting losses

WeWork’s revenue for the first half of 2019 may have been more than double that of a year earlier, but its losses are accelerating just as rapidly. The company indicated in its IPO filing that losses ballooned to more than $900 million in the first six months of the year, which follows full-year net losses of $1.9 billion in 2018.

Massive losses have become part and parcel of unicorn IPOs, as demonstrated by the debut of fellow high-flying tech companies Uber and Lyft earlier this year, among many others. But WeWork continues to face tough questions around the sustainability of its business and few of them were answered in its S-1.

“You can say I’m growing faster, but you can’t say that if for every dollar you’re getting, you’re losing a dollar,” said Renaissance Capital principal Kathleen Smith.

Similarly, MKM Partners’ Rohit Kulkarni said in a note Friday that investors would “have to take a big leap of faith in order to believe that WeWork would show signs of a sustainable economic model” given the rising costs across its 528 locations. He said WeWork could soon find itself strapped for cash.

“At an estimated $1500-200mn in cash burn per month, we believe the company has about six months in execution runway ahead before facing a cash crunch,” Kulkarni wrote in a research note.

Expensive lease agreements

WeWork’s lease obligations bear some attention.

The company signs long-term leases with landlords that last up to 15 years, which requires it to pay hundreds of millions of dollars in future rent, according to data provider CB Insights. In the S-1 filing, WeWork said future lease payment obligations were $47.2 billion as of June 30, up from roughly $34 billion at the end of 2018.

At the same time, WeWork offers short-term rental contracts to members, in an effort to provide flexibility, collecting rent at an average of a two-year timeframe, Smith said.

This is a boon for its members, but could present a risk to WeWork’s business, as these short-term renters could up and leave at any time, leaving the company on the hook for long-term rentals.

“That mismatch can be deadly in a recession,” Smith said. “It means the company has got to be able to pay the lease costs. If for some reason there’s price pressure, lack of renewals, cancellations and they have a time where they’re not leasing out their space, that could be a very huge risk in a recession.”

The company’s declining revenue per membership also raises some concerns.

WeWork estimates a total addressable market opportunity of $945 billion, when applying its average revenue per WeWork membership to its potential member population, the filing states. However, WeWork also warned that revenues per member will decline in the future as it expands internationally into “lower-priced markets.”

“Investors want to see [average revenue per member] increase, because that can prove this idea of ancillary services,” Smith said.

Services are expected to be a long-term driver of the company’s revenue. CEO Adam Neumann has stated previously that he sees WeWork as a “global platform” for things like “space-as-a-service,” a play on the phrase software-as-a-service.

If WeWork is already having trouble increasing its average revenue per member, it could be challenging to get members to shell out a couple extra dollars on things like software or other services…

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