WeWork: How to Play What Happens Next
Charles Schwab told CNBC earlier this week that he would never buy the money-losing companies going public these days.
Neither would I.
This year’s initial public offerings have been the least profitable of any year since the tech bubble nearly 20 years ago. They’re a sham being foisted upon unsuspecting investors.
WeWork, a media darling that Wall Street loved to talk about, is a particularly egregious example.
The workspace sharing company was supposedly worth $47 billion just prior to pulling its offering according to greedy lawyers, Silicon Valley execs, and angel investors – all of whom were hoping you wouldn’t notice that the math doesn’t add up.
I only wish the company had blown up sooner.
Let’s start with WeWork, and with a Marketing Professor at the NYU Stern School of Business named Scott Galloway.
I’ve never met him, but I love the guy.
Galloway penned a scathing article on Wall Street’s latest darling, – and now fallen angel – WeWork, this past August entitled “WeWTF” then went on to write a follow-up titled simple, “WeWTF, Part Deux.”
In both – and I’m paraphrasing here – he noted that the $47 billion valuation being heaped on the company by breathless Wall Streeters and self-indulgent technologists, convinced the rest of us simply don’t understand reality. He claimed the alleged valuation was, and I quote, “Insane. Seriously loco,” and an “illusion of prosperity.”
Of course, Galloway is far more diplomatic than I am.
I called WeWork a POS (look it up). I thought Uber Technologies Inc. (NYSE:UBER), Lyft Inc. (NasdaqGS:LYFT), and Peloton Interactive Inc. (NasdaqGS:PTON) were bad, but WeWork is a whole new level of slime. Bluntly, it’s also the poster-child for everything wrong with today’s IPO market.
We’ve talked about IPOs, and why they’re so dangerous for your money, many times over, so I’m not going to repeat that today.
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Save two points:
First, when I first started in this business nearly 40 years ago, companies went public because they needed capital to grow or to feed already profitable businesses. Now, they go public because some hair-brained technologist has cooked up a bunch of gobbledygook using the words “visionary, transformative and unique.”
Second, being or becoming profitable – ever – is immaterial as long as the unsuspecting public falls for the ongoing hallucination that the company is “transformative,” or its leaders are somehow superior thinkers to the rest of us.
Views like mine are, of course, akin to financial heresy. As you might imagine, I get scowled at a lot when I bring up the whole money-making-thing at cocktail parties or during seminars.
People with sugar-plums in their eyes and unicorn dust in their drinks just don’t want to hear it.
They need to.
Consensual delusion is not an excuse.
WeWork leased space which it then subleased to other clients, all the while insisting that it receive technology-like valuations that allowed the company to camouflage the cost of expensive buildouts, a big footprint and reportedly 15,000 employees.
Then, as if that weren’t enough, former CEO Adam Neumann apparently liked to leave cereal boxes full of weed on the private jets he chartered, fancied tequila parties, and even told people he’d run to become President of the World. After becoming a trillionaire, naturally.
All part of the magic, if you spin it positively, or so went the thinking according to Goldman Sachs and JPMorgan Chase. The two banks reportedly stood to collect $130 million in fees for convincing a few select analysts who would, in turn, carry the message to the investing public, that WeWork was worth $40 to $65 billion.
Moral compasses don’t apparently go for much these days.
According to Barron’s, Oracle Founder Larry Ellison, a man I respect deeply for accurately seeing things like they are, even when it’s unpopular to do so, called WeWork “almost worthless.”
Dick Costolo, Twitter’s former CEO, noted to the Wall Street Journal, that the “degree of self-dealing in the S-1 is so egregious” that you’ve got to wonder if there’s an “appropriate level of self-awareness.”
For once, Wall Street is holding the bag on this one.
Neumann borrowed more than $750 million against his stock holdings and has apparently sold hundreds of millions of dollars of shares… none of which were disclosed in the pre-IPO documents. He’ll walk into the sunset “rich as Midas,” leaving 15,000 employees to clean up the mother of all messes.
I only wish the WeWork situation had blown up sooner.
That way the investing public wouldn’t be left holding the bag for three other companies cut from the same cloth: Uber Technologies Inc. (NYSE:UBER), Lyft Inc. (NasdaqGS:LYFT), and Peloton Interactive Inc. (NasdaqGS:PTON).
Despite what millions of people want to believe, these companies will not suddenly zoom to profitability after years of losing money any more than WeWork will chart a course out of this mess that doesn’t involve bankruptcy.
Uber’s debut last May after reporting a $1.8 billion loss. It’s lost another $17.89 billion, and expectations are as low as revenue of $14.01 billion by 2020. Shares have declined $15.09, or 33.59%, and will likely fall as the WeWork situation raises more questions than there are answers.
Lyft debuted last March after reporting a $900 million loss. It’s lost another $11.02 billion and expectations are for $3.77 billion in revenue by 2020. Shares have declined $39.41 or roughly 50.34%, and it, too, is likely to fall as reality sets in.
Peloton, of course, debuted just 15 days ago. Shares dropped 11% the first day it traded and are now trading at $22.53 a share, or 22.31% lower than the initial offering price. The company is moving farther away from profitability with each passing day, and profit margin is falling from year to year – from 44% in 2018 to 42% in 2019, while its fixed costs as a share of revenue are rising faster, from 54% to 64% over the same time period.
Run – don’t walk – away while you still can.
Uber, Lyft and Peloton ARE publicly traded companies with a combined aggregate value of $68.19 billion, which means there’s a lot of skin in the game. But, for how much longer?
I think Uber and Lyft drop 80% in the next two years. Peloton, which according to its offering documents sells “happiness,” may hang on a little longer, given the related beef-rush into fake meat and the green grab in cannabis stocks. Ultimately, it too will get a “flat.”
If you’re an investor, consider yourself warned and steer clear. None of these companies have a place in a legitimate investment portfolio.
If you’re a trader with solid risk management skills and an understanding of the speculative risks involved, that’s different. Consider shorting, buying put options, or otherwise betting on the downside.
Act quickly if you’re interested, though.
I placed a few calls prior to publication and apparently shares are hard to “borrow” – meaning Wall Street’s bears have already snapped up the bulk of shares that can be lent out for short-selling.
Until next time,