WeWork Becomes One of the Largest IPOs This Year

WeWork: the beginning

It often happens that an idea seems to come out of nowhere. This was the case of WeWork. Owning a plant producing clothes for children, Adam Neumann met Miguel McKelvey, co-founder and architect. Neumann's enterprise did not yield enough profit, and he was looking for ideas for a new business. They noticed that there was too much space in their office: they used just a part of it but paid for the whole premise. Then, it occurred to them that they could let out parts of the office to beginner business persons so that they could cut down on their expenses at the start and increase the rented space later.

This was the start of well-known WeWork. Only, at first the project was called Green Desk; then Neumann and McKelvey sold it and invested the money into a new company they called WeWork.

WeWork financing

The company was born in the USA, spreading to other countries with time. The bigger it grew, the more investments it needed, so several rounds of fundraising were carried out.

Currently, the largest investors of WeWork are the Japanese SoftBank, JP Morgan, Benchmark and We Holdings, the latter controlled by Alan Neumann.

WeWork growing quickly

WeWork may be called a fast-growing company. The growth has been especially prominent during the last few years. In 2016, the company's income was 436 million USD, 886 million USD in 2017, and in 2018 it more than doubled, amounting to 1.8 billion USD; the first 6 months of 2019 yielded 1.5 billion USD. Thus, the company's income may reach 3 billion USD by the end of the year, almost doubling last year's values again.

However, each medal has its other side: along with the income, the company's losses are also increasing, having amounted to 904 million USD by the end of the last 6 months. However, it will always be this way: any fast-growing company needs money, and while the world economy is trying to grow, the company is putting maximum effort in increasing its presence on the market.

As an example, we may recall Tesla (NASDAQ: TSLA) that still does not earn a fixed return, but this did not prevent its stocks from growing from 20 USD to 380 USD.

On the market, much depends on the investor's mood, which is not always predictable. Let us take Tilray (NASDAQ: TLRY), which IPO was carried out in 2018: their stock price initially was 23 USD but two months later it reached its maximum of 300 USD; meanwhile, the company has never been profitable.

Here, sheer financial indices were clearly not enough: the Internet discussion of marijuana legalization in the USA played its part, and investors decided to make a profit on this company’s stocks specifically; however, there were many more options. The current IPO is also receiving much attention in the media, being one of the biggest this year along with the IPOs of such companies as Uber or Lyft.

As for the company’s losses, WeWork will start receiving net profit the very moment it slows down its development a bit. Naturally, this is not going to happen, otherwise, the company’s minor competitors will grow to its scale and capture its part of the market, which it has been struggling for.

About WeWork

Today, the company has its offices in 803 business centers and 124 cities all over the world. It has such divisions as WeLive (flat rent project), WeGrow (private school for children), WeRise (sports center project). Most of its profit is generated in the USA as the company has started its development and has most of its offices there; as usual, the quickest segment to develop is the corporate client segment, bringing 40% of profit to the company. The number of participants paying rent has reached 527 thousand which is 90% more than a year ago. This shows how quickly the company is growing.

According to the management, the company occupies only 0.2% of the market, and its closest goal is to increase its presence to 280 cities in order to attract 255 million potential clients.

WeWork rivals

Among the company’s competitors, Regus (LSE: IWG) may be singled out. The company was founded in 1989; its stocks are traded at the British stock market.

By the end of the first 6 months of 2019, the income of Regus has amounted to 2.077 billion USD; the income of young WeWork for the same period has reached 1.8 billion USD; It seems that the WeWork income will be higher than that of Regus in 2019. Nowadays, Regus is present in more than 1000 cities of 110 countries, while WeWork – in 124 cities and 27 countries only; at the same time, WeWork holds 527,000 rent agreements against 445,000 of those held by Regus.

This means that WeWork is more concentrated in each city and is more popular among the young. WeWork invests money in building and buying new office buildings as well as tries to use the existing premises most efficiently; to put it simply, it attempts to increase the number of renters on a square meter of an office building. It turns out that WeWork has already managed to outflank its competitors with fewer cities of presence.

Another promising company that may soon compete WeWork is Knotel Inc. It is a very young private company, founded in 2016 and currently present in 13 cities in 10 countries only. On August 21st the Knotel management happily announced that it had completed another round of investment attraction that brought the company 400 million dollars. This company is not traded publicly yet, which means its number of investors is limited, while WeWork is entering the public market, and it might be said that at the moment it does not have a full-scale rival in terms of development and growth speed.

The capital attracted during the IPO will help the company boost up its development and its presence on the market. If later it needs financing, it may carry out an SPO and attract even more capital. I.e., upon entering the stock market the company gets unlimited access to the capital that it may use for its purposes.

In this situation time passing does only good to WeWork; a supplementary source of financing will help to increase the gap between the company and its main rivals, which, in the end, will contribute to the growth of its stock price. Thus, the company's potential is just huge; if it keeps its pace for several years, at least, investing in WeWork may yield colossal profit. However, when investing, one should always take a look at the other side of the medal.

Risks

Among the main risks we should, first and foremost, name the company's management, more precisely, its director-general Adam Neumann, who is the intellectual property seller, the fund receiver and the landlord of the company.

According to the registration documents, Neumann himself and his relatives have reached into the very heart of the company, using it for their own purposes, which seems risky to many investors. On the other hand, there are situations when stockholders take voting rights away from the founder and later do as they please to the company, stealing the creation away from the creator. This scheme looks attractive to the stockholders but not to the founder. Currently, Neumann has insured himself from this scenario.

However, the company is entering the stock market, and potential investors wonder how much they can earn with it, and here it turns out that the one earning with the company is Neumann and his supporters. To understand how Neumann uses the company, a couple of examples will be enough.

WeWork has paid We Holdings, controlled by Adam Neumann, 5.9 million USD for the trademark WE. Neumann owns 4 real estate objects that he lets out to WeWork, but the money for the purchase of the real estate he has loaned from the company. Meanwhile, WeWork always pays the rent on time and fully, without any discounts.

Neumann's wife Rebeka is named founder and director-general of WeGrow, the project for creating and managing private schools. The wife's brother Avi Yehiel has been head of the WeWork health center since 2017. Neumann himself is an influential stockholder thanks to 3 classes of stocks with different voting rights.

The second risk for the company is the possible crisis that has been expected for a year already. The crisis may become a serious trial for the company as 40% of its income is generated by corporate clients that will reduce their spendings in case of a crisis, as well as the number of employees working in the office, which means the offices will stay empty and bring no profit.

WeWork has long-term contracts (for 15 years) signed with landlords at the rates lower than they rent their premises out to their potential clients, and they will have to execute their commitments even in case of a crisis, while outflow of clients may lead to huge losses.

However, it should be said that the management has tried to minimize this risk. Currently, the minimal length of rent from WeWork is 15 months, which may be enough to survive a wave of crisis. And after any crisis, a rise follows, and here one counts on startups and small businesses as they are more mobile and can change according to the situation quickly. The second factor is the presence of subsidiary companies, via which long-term rent agreements are signed with landlords; this scheme makes it extremely hard to demand compliance with the renting commitments from the parent company WeWork. However, this entails risk of bankruptcy of the subsidiary companies, and in order to avoid it, the parent company WeWork guarantees payment of a part of the rent, so that in case of trouble it could support its subsidiaries.

Summary

The WeWork management warns that the company's work is going to entail losses, especially if it keeps developing so rapidly. It turns out that, like in the case of the IPO of Uber, investors will inevitably have to take a risk and buy the stocks of a losing company, hoping for the best; but here Neumann also sold stocks for 700 million USD before the IPO.

Normally, founders sell stocks during the IPO in order to attract capital, if they need more finance. In the end, analysts presented it as a negative piece of news, as if the owner were getting rid of the stocks of his own company. On the other hand, if Neumann had started selling stocks on the day of the IPO, it would have influenced the price, pressing it down, and have scared off other investors. So, I would take this news as rather positive; moreover, Neumann took loans upon the security of his stocks, and his actions mean that he is sure in the future of his company. McKelvey, by the way, keeps his stocks.

Another important fact, confirming the growth of the company, is the lack of real rivals to WeWork on the market; it has circumvented the existing ones before the IPO.

I, as any trader, am most of all interested in what to do on the day of the IPO and whether to buy the stocks, because due to the Lockout period we will have no chance of making a profit on selling. Everything written above makes one think well whether to hold the company's stocks for several months or, perhaps, years.

Earlier, I wrote an article about the IPO and how to make money on it. In the article, I called the underwriter crucial in making the decision about buying the company's stocks; more precisely, the trader should check how large the underwriter is. In the case of WeWork, the underwriters are JP Morgan Chase and Goldman Sachs, which is a strong stimulus for buying. Then, if Neumann manages to loan 3 billion USD (at the moment no one dares give him such a sum), he will use them, as promised, to support the stocks on the day of the IPO, which may also increase the stock price. However, in this situation, it will be wiser to sell the stocks in a week's time because the growth will be artificial.

And one more important thing. According to the table above, the company managed to attract 5 billion USD in the last round of financing, increasing the number of stocks to 70 million. In other words, if we divide the sum by the number of stocks, we will have a stock price of 71.43 cents. I.e., this is the approximate market price of a stock. Here, we should keep in mind one thing: if the number of stocks offered for selling amounts to 900 million pieces, the price should become two times lower.

Let us have a look at the IPO of Slack (NYSE: WORK), which stock price on the secondary market was 26 USD, trading began at 38 USD, and by now the stock price has dropped to 30 USD, i.e. the company is aiming at the price on the secondary market. This principle should be valid for WeWork as well. If the placement price will be lower than on the secondary market, it will be a great signal for buying on the first day.

The current news is not the best for the IPO of WeWork, analysts remain skeptical about the company and its success on the exchange; naturally, Neumann knows all this and, most likely, will wait for the best moment for placement, so we only have to wait and watch the company.

Open Trading Account