In Focus: We Work
Thanks for checking out this week's In Focus, our look into a company, companies, market, or markets that made Wall Street's news cycle. This week we bring WeWork in focus.
We've heard and read a lot about WeWork over the past two weeks. There's been lot's of bad news coming from WeWork's way. As the company gears up for it's IPO, the one time unicorn has lost some of its magic.
I've written about the Wall Street unicorns that were to go public in 2019 earlier in the year and WeWork made that list. The list featured companies that Wall Street couldn't wait to invest in like Uber (UBER), Lyft (LFYT), AirBnB, Slack (WORK), Pinterest (PIN), and WeWork. But now that the day is almost here, Wall Street doesn't seem too excited about investing in WeWork anymore.
Some of the issues surrounding WeWork currently are the valuation. Not that long ago Softabank - a major WeWork investor - valued WeWork at $47 billion. Now the company is seeking a valuation between $10 and $20 billion according to reports. There are also concerns about the three classes of stock, with the B and C classes of stock carrying 20 votes per share. There is also the procedure on how a new CEO would be named should Adam Neumann die or become incapacitated. If Neumann was unable to run the company, his wife - who is not a director of the company - would choose the next CEO with the assistance of two of the company's directors. There is a decent sized list of issues surrounding WeWork, which you can read about here, here, and here. If you want to check out the S1 for yourself you can read that here.
Changes were recently made to correct some of the issues noted above. Now, those classes of stock that carried 20 votes per share carry 10 votes per share. But still there's a lot of red flags and warning signs coming from WeWork.
Investing in WeWork
I usually stay away from IPOs and I plan on doing the same with WeWork, but for those who want to invest in WeWork or are thinking about investing WeWork, the questions you need to ask are who is Adam Neumann and can he lead WeWork to the promise land?
We know Adam served in Israel's military for five years and was discharged as a captain. We know he went to the Zicklin School of Business at Baruch College, which is not a name you'll here nationally, but it is a well respected business school in New York City. Since starting WeWork Neumann has acquired several high priced properties in New York City, Central New York, and San Francisco according to Business Insider. Aside from his real estate investments he's invested in several other ventures like Faraday Grid, InterCure Limited, EquityBee, and Hometalk to name a few. According to his Wikipedia page Neumann did start a co-working space prior to WeWork. He was able to sell his portion of that company (Green Desk) and use the experience he gained to start WeWork. This small view into Neumann's past is impressive, but can he lead WeWork and the company's investors to the promise land?
Is He Mark or Evan?
In the current investment climate, when I look at young companies for a possible investment, and I analyze the CEO, the only thing I need to figure out is, is he/she Mark or Evan?
I know neither Mark Zuckerburg or Evan Spiegel personally, I can only make assumptions based on what I've seen and read. But Mark and Evan, and the companies they lead are good yardsticks for me to measure many of the hot unicorn companies coming public.
What I've always taken away from Mark Zuckerberg is that he is a calculated individual who is thinking years ahead of the average Wall Street analyst and investor. This was demonstrated in his "there will always be a free version of Facebook" response to analyst who swore to the Finance Gods that Facebook (FB) had to charge users a fee to be a successful company. Another example is Facebook's acquisition of Instagram. Wall Street hated it at the time, now Instagram is the hottest thing in social media. I also see Zuckerberg as someone who listens but doesn't follow Wall Street. Facebook and its growth remains in his vision, and so far that has worked out very well for shareholders. Facebook went public at $38 per share and now trades at $187.19 as of this writing.
With Evan Spiegel I see the not so cool kid get cool and then lose focus. He reminds me of the Patrick Dempsey and Nick Cannon characters in "Can't Buy Me Love" and "Love Don't Cost a Thing" respectively. As his notoriety increased and his coolness expanded, the focus on SnapChat (SNAP) decreased and SnapChat lost some of its coolness. It also seems to me that Spiegel listens intently to Wall Street, which I believe was the reason behind the terrible SnapChat redesign. SNAP went public at $17 per share and is trading at $16 per share as of this writing.
Which One is Adam Neumann?
Will he be intensely focused on WeWork and building it into a juggernaut real estate company, or will he lose focus when he becomes the next tech billionaire cool kid with a public company?
WeWork is like many tech companies over the last decade, growing revenue at a good clip, but losing money, with no breakeven or profitable quarter in site. WeWork is another horse in the race, no bigger, better, or faster than any other horse. It will come down to how good of a jockey Adam Neumann is, and how much he can get out of his horse.
"We also expect to incur additional general and administrative expenses as a result of our growth. These expenditures will make it more difficult for us to achieve profitability, and we cannot predict whether we will achieve profitability for the foreseeable future." - The We Company S1
Why the Jockey is so Important
When I analyze WeWork I see enough good and bad for a bull or a bear to make an argument to invest or stay away. WeWork believes there is a $1.6 trillion market for what they offer, that is definitely a positive. The company's ability to attract companies like Salesforce (CRM), GE Health (GE), and Dropbox (DBX) as customers tells investors that WeWork is more than just a place for start-ups and freelancers. The company operates 528 facilities in 111 cities and has over 500,000 members, another positive on the part of WeWork.
But then there is the bad, much of it related to the corporate governance that I discussed earlier. There is the issue of the long term leases WeWork signs for their properties versus the short-term leases the members sign with WeWork. Many analyst believe this will cause WeWork to go insolvent should we hit a recession, and this is a fair assessment.
IWG, formerly known as Regus was WeWork before WeWork. Regus filed for bankruptcy protection following the dot.com bubble burst. After a few years of struggles and a name change from Regus to IWG the company regained it's footing in the market and is now valued at £3.5 billion.
There are many obstacles ahead for WeWork, having the right person steering the ship or riding the horse will be extremely important to the company's long-term success.
Sitting on the Sidelines
As with most IPOs I will be sitting on the sidelines gathering intelligence. I'll be looking out for how Neumann and company handle the current negative press surrounding WeWork's corporate governance. I'll also be looking out for how the company handles it's first earnings release as a public company. Quarterly earnings are a different beast when you're running a public company and you have to answer to the public. Add to that the investment media, me included, dissecting every number in the earnings report and every word of the earnings call. I'll be looking out for how Neumann handles that first of many big price drops in the stock price, and lastly I'll be looking at Neumann's growth as a CEO, is he morphing into the next Jeff Bezos or the opposite of that?
While I have no plans on investing in WeWork when it hits the markets, a no today doesn't mean no next quarter or next year.
This is where I leave you. If you're planning on investing in WeWork, let me know what your reasons are on Twitter. Tell me what you love about the company or the management @sevillereport, #WeIPO.
Thanks again for checking out In Focus.