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What WeWork’s pulled IPO tells us

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

News came late last night that WeWork, the shared workspace provider, had pulled its stock market debut.

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The New York-based property group said it had been forced to shelve its initial public offering having failed to drum up enough investor interest.

It probably shouldn’t - and most likely didn’t - come as a total surprise. Signs that things were not going to plan became evident late last week when shares were being touted around at prices that valued the company at between $15 billion and $18 billion; far short of the $47 billion that was initially suggested.

The company’s multi-billion dollar valuation was clearly based on its reputation and its positioning. And there’s no doubt that has been half the appeal for those who believe in the brand. A property company it might be in reality, but WeWork has been keen to position itself among the likes of Facebook, Google and Amazon; calling itself a tech company and reportedly mentioning the word ‘technology’ 93 times in its prospectus. And let’s not forget, this is a company that rents out office space.

That’s not to stay that WeWork is a non-starter; far from it. Founded in 2010 in the SoHo district of New York City to provide co-working space primarily for freelancers and small startups, in just nine years the company has grown rapidly. It now has office space in 528 locations in 111 cities across 29 countries.

In 2018 the company turned over $1.54 billion. That’s nearly double the $764 million it made in 2017. That’s phenomenal and would be a sign of great things to come for many companies. However, the problem for WeWork is that its losses are - unfortunately - just as phenomenal. In 2017 it lost $900 million, but by 2018 the figure had more than doubled to $1.9 billion.

So that sky-high valuation, at around 26 times revenue, is equally staggering when you put it into context. And arguably has more than a whiff of the early ‘Noughties’ dot.com boom (and subsequent bust) about it.

And it shouldn’t have really. As I already mentioned, this is a real business, with a real business model to it. It’s actually quite simple. It leases properties from landlords, adds funky work spaces and equally funky break-out areas with kombucha-filled fridges and rents out these spaces to self-employed workers, start-ups and anyone else who wants such a space to work from. All for about £600 a month for a desk in central London, on a rolling monthly contract.

What highlights the over-valuation more than anything is that what it offers might be trendy and have captured the imagination of today’s army of entrepreneurs and flexible workers, but it’s not really doing anything new. Regus might not have quite the same kerb-side appeal to today’s up-and-coming start-up boss, but it does exactly the same thing.

Owned by Belgian company IWG, Regus has more square feet of office space than WeWork, earns more revenue, and actually makes a profit, yet it has a market cap of just $3.7 billion, less than 10% of WeWork’s most recent valuation.

WeWork might well be on a mission to “elevate the world’s consciousness” and that might appeal to trendy young things today. But if we do face an economic downturn, corporate belts start tightening, and that £600 a month for “space-as-a-service” starts to weigh a little more heavily on those start-ups’ costs, the kitchen table might start to look a better bet. And that would leave a lot of room sitting empty in WeWork’s shared work spaces.

What is most telling though is that, even at the much lower valuation, investors still aren’t interested. In a world in which uncertainty is currently the only certainty, investors clearly want to know what they’re getting. There is no space in investors’ portfolios in this day and age for stocks that have any risk of not living up to their hype.

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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