Why WeWork Could Be the Star of 2019’s IPO Class

WeWork hasn’t even gone public yet, but the start-up is already one of the most controversial companies out there.

Now valued at $47 billion, the 9-year-old office-sharing juggernaut has inspired plenty of skepticism about its valuation, as well as basic questions from investors like what the company actually does, and whether or not it’s a tech company.

Though WeWork is growing rapidly…

(revenue jumped 113% to $728 million), its losses are also expanding. Adjusted EBITDA loss more than doubled in the quarter, to $220 million, and net loss, excluding an investment gain, rose from $274 million to $631 million. Both revenue and losses more than doubled in 2018 as well. Revenue reached $1.8 billion, but the company lost $1.9 billion.

Concerns about hefty losses have sent stocks like Uber  and Lyftfalling since their debuts earlier this year, and threaten to spoil WeWork’s IPO. However, WeWork is a fundamentally different business from Uber, Lyft, and Airbnb (which could also initiate an IPO this year), and shouldn’t be grouped together with them.

A closer look at the company’s fundamentals and its long-term opportunity shows that it could be the big winner in this year’s IPO class if or when WeWork actually goes public. Here are three reasons:

1. The unit-level economics are solid

Though WeWork is putting up massive losses, those losses are due more to its rapid expansion rather than to problems with the fundamental business model. WeWork says individual locations are profitable once they are leased, and that the company would be profitable today if it stopped expanding.

It’s expensive to sign new leases, renovate spaces, and recruit new clients, and the company loses money as it fills its new locations. WeWork finished last year with an 80% occupancy rate, down from 84% a year ago, as it accelerated its expansion. Its average revenue per member was $6,360, though that was also down from prior years.

Critics have charged that WeWork is little more than a lease arbitrage business — it leases office space, divides it up, and then subleases it to tenants to turn a profit. The problem with that model, they say, is that it tends to fare poorly in recessions. WeWork CEO Adam Neumann has responded to this concern by saying that WeWork locations in countries like Argentina and China have already been subjected to economic slowdowns and have still performed well. He also said that WeWork locations are 50% to 70% cheaper than competing office space, making it an attractive proposition in a recession, when businesses would be looking to trim real estate costs.

2. It’s more than a co-working space

While co-working is the easiest way to describe WeWork, it’s much more than that. Neumann and his management team see the company’s goal as fostering community above all else. In other words…

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