If you want to know why initial public offerings (IPOs) and new stocks are dangerous, you need to examine WeWork.
WeWork went from the stock of the decade; and the future of the work to the poster child for failed IPOs in less than two months. WeWork management filed the S-1 documents needed to go public as the We Company with the Securities and Exchange Commission (SEC) on August 14, 2019.
Investors paid attention because the S-1 claimed WeWork’s revenues were growing at a rate of 100%, Crunchbase reports. Early reports claimed analysts valued the We Company at $47 billion.
Problems began on September 5, 2019, when Bloomberg alleged WeWork’s actual value was between $20 billion and $30 billion. Bloomberg was alleging that WeWork’s true value could be less than half of the management’s claims.
WeWork Stock Price
Greater problems began on September 9, 2019, when The Financial Times claimed Softbank was urging WeWork to cancel the IPO. Softbank is one of WeWork’s biggest investors; it led a $1 billion investment in WeWork in January 2020.
WeWork itself began raising doubts by filing paperwork to change governance. Rebekah Victoria Neumann had a role in replacing the We Company’s CEO, the September 13, 2019, SEC filing indicates.
Rebekah is the wife of WeWork cofounder and CEO Adam Neumann. The filing worried investors because it gave an outsider influence over management. The same filing reduced Adam Neumann’s voting power at the We Company.
On September 17, 2019, The Wall Street Journal claimed that WeWork was planning to delay the IPO until October 2019. Investors became scared after WeWork management refused to deny The Journal’s allegations.
A week later, on September 24, 2019, The Information claimed WeWork was planning to fire one-third of its employees, or 5,000 people, to save money. On the same day, Adam Neumann quit his job as the We Company’s CEO.
Investors forced Neumann out because of allegations the CEO was smoking marijuana and making bad decisions. Many people were skeptical of the bizarre corporate culture Neumann fostered and the influence his wife had over the company’s governance.
On September 30, 2019, WeWork’s CEOs Artie Minson and Sebastian Gunningham announced the IPO was indefinitely delayed. The two claimed WeWork has “every intention to operate WeWork as a public company and look forward to revisiting the public equity markets in the future” in a press release.
The We Company changed its name back to WeWork in October 2020, Reuters reports.
The name reversion was one of many changes made by new management Softbank installed, Reuters reports. Softbank kicked Adam Neumann out because the former CEO had trademarked the name We Company.
Neumann sold the We Company trademark to WeWork for $5.9 million. Neumann returned the money and surrendered the trademark after media criticism.
On October 29, 2020, WeWork’s new Chief Executive Officer (CEO) Sandeep Mathrani told Bloomberg the company could hold another IPO in 2020. Mathrani said he would consider another IPO when WeWork turns a profit.
WeWork is withdrawing from markets including Hong Kong. Competitor IGW has taken over office space WeWork vacated in Hong Kong, The South China Morning Post reports. ISW has leased two spaces formerly used by WeWork in Hong Kong.
WeWork’s business model is so unusual it has several names. Reporters call the business co-working or space-sharing. WeWork, however, uses the term Space-as-a-Service. Competitor IWG uses the term flexible space.
That means WeWork rents five different types of office space. The difference between WeWork and a traditional landlord is that WeWork rents office space on a flexible basis.
WeWork can provide an office or a meeting room for a few hours or days or for a long term lease. Another difference is that WeWork sells memberships that give members access to its properties all over the world.
A New York WeWork member can fly to London and use the WeWork office in that city during a business trip. WeWork makes money by selling two kinds of membership: All-Access and On-Demand. All-Access members pay a flat rate for the use of any WeWork facility. On-Demand members only pay for the office space they use. WeWork generates other revenues by renting additional services such as conference rooms to members and by selling tickets to events.
Another difference between WeWork and a traditional office is that WeWork provides all the amenities, equipment, and services its customers need. WeWork provides desks, chairs, printers, IT, high-speed internet, copiers, beverages, meeting rooms, and support staff. The WeWork customer can walk in and go to work at any time. Many WeWork facilities are open 24 hours a day and seven days a week.
WeWork offers both private workspaces and open workspaces (co-working environments) to customers. The private workspaces are fully-furnished offices. The three private workspaces are a standard office, office suites, and full-floor offices. Thus WeWork can use private office space for one worker or a large team.
The open workspaces are hot desks and dedicated desks. The hot desk is a desk in an open work area any WeWork member can use. The dedicated desk sits in an open area, but they lease it to one customer.
WeWork allows members to book workspace by the day and meeting rooms by the hour through its app. WeWork members range from individuals to large companies. WeWork’s website claims those customers include Microsoft (MSFT), Slack (WORK), and Salesforce (CRM).
Vox Recode estimates WeWork leased 45 million square feet of office space at 528 locations worldwide in August 2019. WeWork operated in 111 cities in 29 countries in August 2020. WeWork provided over 604,000 work stations for its members in August 2019.
The number of WeWork locations has shrunk since August 2019. The South China Morning Post reports that WeWork has closed offices in some cities, including Hong Kong. WeWork claimed to have 500,000 members in 2019. Its larger competitor IWG had 2.5 million members in August 2019.
A key difference between WeWork and older office-rental companies is that WeWork offers information technology (IT) support in the form of a platform. WeWork employed 1,000 engineers to support its platform in August 2019, Vox Recode claims. WeWork could have laid many of those engineers when it eliminated one-third of the workforce in October 2019.
The platform allows WeWork members to integrate their technology into its system. That means WeWork members can store their data in WeWork’s cloud and access WeWork’s networks and cloud with their computers. A member can print documents from his documents on WeWork’s machines, for instance.
WeWork tried to brand itself as a tech company. I consider WeWork a real estate company because its main product is office space. WeWork is a landlord that makes money by renting office space. However, WeWork has a unique model for renting that office space.
Why the WeWork IPO failed
I think the main cause of WeWork’s IPO failure was an unrealistic valuation based on hype rather than real numbers.
Some analysts valued WeWork at $47 billion in August 2019, Fast Company notes. However, the same analysts valued WeWork’s closest competitor International Workplace Group (IWG), at $3 billion.
IWG had more locations, more members, and more revenue than WeWork at the time of the IPO. Recode estimates IWG had over 3,000 locations, 2.5 million members, and revenues of $3.4 billion in 2018. WeWork, in contrast, had 528 locations, 500,000 members, and revenues of $1.8 billion.
Analysts failed to a close look at We Work until just before the IPO. Another problem was the former CEO, Adam Neumann. Critics accuse Neumann of corrupt and arrogant behavior as WeWork CEO.
Neumann bought stakes in real estate that WeWork leased, The Atlantic alleges. I think that practice resembles insider trading. Neumann also tried to pay himself $5.9 million for the copyright to the name We Company. There are also allegations that Neumann smoked marijuana on company planes and encouraged drinking at work by pouring tequila shots for employees.
Atlantic writer Ian Bogost alleges Neumann designed the IPO to give himself over half of WeWork’s voting power. Neumann hired his wife Rebekah Neumann as brand chief and impact officer. Rebekah Neumann used her position to start a private elementary school, WeGrow, rather than promote WeWork’s core business offices.
Bogost believes WeWork’s business plan was flawed and doomed to fail. The writer thinks a co-sharing business model is incompatible with a for-profit company.
3 WeWork Stock Options Alternatives
IWG PLC (LON: IWG)
IWG claims to offer flexible workspaces at 3,300 locations in over 1,000 cities in over 110 countries. IWG (PLC) itself is a holding company based in Switzerland that owns 14 flexible workspace brands.
IWG’s brands include Regus, Spaces, HQ, Signature, No. 18, Basepoint Business Centres, Openoffice, BizDogjo, Stop&Work by Regus, The ClubHouse, too the Office Operators, Managed Office Solutions, Easy Offices, Meetinggo, and Rovva. IWG is a stable company, and founder Mark Dixon is still the CEO.
IWG made money in 2019. It reported an annual operating income of £52.1 million ($68.53 million) and an annual gross profit of £352.200 million ($463.26 million) in 2019. The International Workplace Group reported annual revenues of £2.699 billion ($3.55 billion) in 2019.
IWG reported an annual operating cash flow of £1.322 billion ($1.74) billion annual free cash flow of £1.031 billion ($1.36 billion) on December 31, 2019. Yahoo reports IWG had an annual end cash position of £357.6 million ($470.36 million) on December 31, 2019.
Yahoo reports IWG had £8.953 billion ($11.78 billion) in Total Assets on December 31, 2019. IWG PLC trades on the London Stock Exchange as IWG. I think Mr. Market overvalued IWG at £337.60 ($444.60) on November 13, 2020.
IWG PLC shares paid a £2.15 ($2.83) annual dividend on December 31, 2019.
IWG shows companies can make money from coworking and space-as-a-service. IWG’s financials also show that the money you make from space-as-a-service does not justify a $47 billion valuation.
I think IWG shows WeWork has a viable business model. The IWG financials demonstrate space-as-a-service cannot generate the enormous amounts of cash that tech companies such as Amazon (AMZN) and Alphabet (GOOG) make.
I believe Space-as-a-Service companies will always generate small amounts of cash because of high operating expenses. Those operating expenses include rent and lease payments and salaries. WeWork employed around 12,500 people, including 1,000 highly-paid tech professionals, in 2019, Recode reports.
I think IWG shows space-as-a-service will always be a high-margin and low-profit business. Investors need to avoid IWG because space-as-a-service is a low-profit business.
Boston Properties (NYSE: BXP)
Boston Properties is the largest publicly-held owner of upscale office buildings or Class Office properties in the United States.
Boston Properties (BXP) is similar to WeWork because it rents office space. The difference is that Boston Properties is a traditional landlord that only rents space. WeWork and Boston Properties compete for some of the same tenants.
Boston Properties is a real estate investment trust (REIT). A REIT owns, manages, and leases real estate to tenants.
A danger for WeWork and IWG is that REITs such as Boston Properties will convert some of their buildings into short-term rentals and co-working spaces. Boston Properties owns office buildings in some of WeWork’s biggest markets, including Boston, Los Angeles, New York City, San Francisco, and Washington DC.
Boston Properties claims to own 13 million square feet of office space. Boston Properties makes money from its properties.
Boston Properties reported a quarterly gross profit of $431.84 million and a quarterly operating income of $234.32 million on September 30, 2020. Boston Properties reported quarterly revenues of $693.27 million on September 30, 2020.
Boston Properties is making less money in 2020 because of coronavirus. Boston Properties reported quarterly revenues of $757 million, a quarterly gross profit of $480.26 million, and a quarterly operating income of $375.81 million on December 31, 2019.
Boston Properties’ real estate generates some cash. Boston Properties reported a quarterly operating cash flow of $228.15 million on September 30, 2020. The quarterly operating cash flow fell from $361.37 million on December 31, 2019.
Boston Properties offers some value. The company had $1.764.79 billion in cash and short-term investments and total assets of $22.959 billion in September 2020.
I think Mr. Market fairly priced Boston Properties at $91.62 on November 13, 2020. In 2020, Boston Properties’ share price fell from $135.58 on January 2, 2020.
I consider Boston Properties a good stock for ordinary people because it paid a quarterly dividend of 98₵ on October 30, 2020. I think Boston Properties will keep paying that dividend because it has long-term leases with tenants such as the Volkswagen Group of America.
Volkswagen leased 196,000 square feet of office space in Reston, Virginia, from Boston Properties for 20 years, a press release claims. Boston Properties is a good stock with a high margin of safety because of leases with companies such as Volkswagen.
The Digital Realty Trust (NYSE: DLR)
People who think remote work is the future of business will prefer the Digital Realty Trust (DLR) to Boston Properties.
The Digital Realty Trust owns 286 Data Centers in 24 countries on six continents. The Digital Realty Trust claims to be the largest owner of leased multitenant data centers. Digital Realty’s tenants include AT&T (T), IBM (IBM), Adobe (ADBE), Verizon (VZ), and Microsoft (MSFT) subsidiary LinkedIn.
Digital Realty can profit from remote work because its data centers support the cloud and host companies’ platforms. Digital Realty can avoid coronavirus’s effects because companies will need more cloud services to provide digital services to all the people working from home.
The companies will need more cloud services and more hosting. Thus, many employers could require more data center space, which the Digital Realty Trust can provide.
The Digital Realty Trust makes money from the cloud. It reported a $623.33 million quarterly gross profit and a quarterly operating income of $144.4 million on September 30, 2020.
Stockrow estimates the Digital Realty Trust’s revenues grew by 72.06% in the quarter ending on September 30, 2020. In 2020, Digital Realty Trust’s quarterly revenues grew from $787.46 million on December 31, 2019, to $1.025 billion on September 30, 2020.
Digital Realty Trust’s data centers generate cash. The Digital Realty Trust reported a quarterly operating cash flow of $468.37 million on September 30, 2020.
The Digital Realty Trust borrows enormous amounts of money. The Digital Realty Trust reported a quarterly financing cash flow of $826.32 million on September 30, 2020.
The Digital Realty Trust is gaining value. The Digital Realty Trust had $971.30 million in cash and short-term investments on September 30, 2020. Digital Realty Trust’s cash and short-term investments grew from $89.82 million on December 31, 2020.
The Digital Realty Trust’s total assets grew from $23.068 billion on December 31, 2019, to $35.435 billion on September 30, 2020. Digital Realty Trust has added value in a pandemic.
I think Digital Realty Trust is an excellent stock for ordinary people because it is a growing company that pays a good dividend. The Digital Realty Trust will pay a $1.12 quarterly dividend on December 14, 2020.
I consider the Digital Realty Trust a cheap way to invest in the cloud because Mr. Market priced it at $144.65 on November 13, 2020. I consider the Digital Realty Trust a cheap way to invest in cloud computing. The Digital Realty Trust is also one of the cloud companies to pay dividends.
Why You Need to Avoid IPOs
WeWork’s history shows why investors need to avoid initial public offerings. WeWork proves promoters base many IPOs on hype rather than profits.
I consider WeWork a classic example of a company that tried to use an IPO to raise money to avoid collapse. I suspect former Adam Neumann planned a WeWork IPO because he could no longer raise money from the capital markets.
Neumann hoped to generate enough cash to pay WeWork’s bills, cover payroll, and pay loans by selling stock. I think Softbank pulled the plug on WeWork’s IPO to prevent Neumann from wasting more money.
The WeWork IPO debacle shows why investors need to buy stock in established companies that make money instead of IPOs.