WeWork’s IPO – where is the value?

Friday, May 17, 2019

Opinion: Jamie Vine, CEO (Originally published on LinkedIn)

I read an interesting article on Reuters this morning (WeWork gets complex, but its problem is simple.)

I urge you to read my take before investing.

The underlying issue is WeWork's lack of focus on yield management and a very naive understanding of how long it takes to increase rate.  

Their strategy seems to be ‘fill your buildings with heavily discounted members and then increase the rates once they have reached mature occupancy’. A classic ‘bait & switch’ strategy of a dominant market player. This approach aims to squeeze smaller, local operators out of the market and provide early cash-flow during rent free. This cash is then used to help fund the losses they are making in their other locations. 

There are several issues with this strategy:

  1. WeWork are not the only Shark in the tank.
  2. What happens when the rent free runs out?
  3. Using your size (and the vast amounts of other people’s money) to buy clients is not sustainable. 
  4. Aggressively decimating a local market to enable you to later control pricing is not good for the customer. As a customer it may seem like a good idea when you get a stupidly cheap deal for an amazing space in a premium building, but if something seems too good to be true, it usually is.  
  5. Blaming growth for cash-burn is a smoke screen. Investors should be looking at the financial performance of all buildings more than 6 months old. In reality the IPO information memorandum will probably provide figures in 2 categories; ‘mature locations’ and ‘growth locations’, which means they will hide the vast majority of their bad decisions in the ‘growth locations’ figures where losses are expected, this will temporarily hide their systemic bleeding from the markets. 
  6. Practically speaking, increasing rates on mass or quickly is almost impossible. On paper it looks plausible. Their clients are on flexible terms so increasing rates should be easy, right? But if you have any experience in the flexible workspace sector you will know it is not that easy at all. Clients who have been enticed by a cheap deal will be easily enticed by a cheap deal somewhere else when your rates increase. They will vote with their feet and the cycle starts again, particularly in quieter markets, many of which WeWork are now entering in order to satisfy their perception of ‘growth’.. 
  7. ‘Turnover is vanity, profit is sanity and cash is king’ has never been a more relevant phrase. Without significant slowing of their growth and a sustained focus on profitability they are creating the biggest house of cards in living memory.
  8. They haven’t been through an economic cycle yet. Operating a flexible workspace business in a downturn, with its vast fixed overheads and fluctuating demand and price, is a difficult and character-building process, claiming value without demonstrating any resilience is worrying.  
  9. How much of the funds raised in the IPO will de-risk the current investors? An important question, is this a way for them to get their money back and still profit from any future growth/upside without risk?

 

I'm reminded to repeat an almost lost phrase I learned from my schooldays, 'Caveat emptor'. Let the buyer beware!

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