Yesterday I wrote: “Your business must make a profit“, finishing that article with a warning about WeWork.
Today, more on that, starting with remembering the lessons of the past and then some alarm bells I am now hearing ring loudly in my ears about WeWork.
I remember the 1999-2000 tech bubble. A few things I remember from then
- I remember people pitching again and again for us to invest in them, feeling first bemused and then frustrated that they only talked about giving us the opportunity to “get in early” before the next round of funding, no mention of the business ever making money
- I remember when people stopped talking about traditional metrics such as (gasp) the P:E ratio, as after all the markets had inflated to the point where traditional PE ratios made no sense
- I remember when people talked about and literally published bestsellers saying that the economic cycle was dead and that we’d never again have a recession.
- I remember when Nasdaq hit 5000 in March 2000 (it took over 15 years to get back there from that point). That was when the bubble went “pop”
So, some lessons from the past:
- We will always have recessions
- When people start making up new metrics and ratios for their business to justify their valuation, watch out
- When they are losing money and consider the need to make profits irrelevant, watch out.
- When they match long term debt with short term revenues, watch out.
So, to WeWork.
Last week FT Alphaville posted “Revealed: the cash cost of WeWork’s global expansion”
The full article is behind the paywall, so will only post some snippets that resonate with the “remembering the past” thoughts above.
(Oh, and as an aside, I happily pay for value received, including paid subscriptions to numerous services and publications such as the FT. In short, highly recommend the FT, quality journalism and contributors abound.)
Revealed: the cash cost of WeWork’s global expansion
“Documents seen by FT Alphaville reveal the huge cash costs incurred by WeWork in 2018 as it became one of the largest global providers of office space. The $47bn business, which is backed by investors including Softbank’s Vision Fund, previously reported a net loss of $1.9bn in 2018, after generating revenues of $1.8bn — more than double 2017’s top line.”
Note : $47bn is only the valuation based on funds raised through Softbank and others. An intelligent investor (using the term in the Benjamin Graham sense of the world) would, I imagine, clearly value WeWork at far, far less based on their own intrinsic value calculations.
For those retroactivists who like traditional financial metrics, FT Alphaville calculates WeWork’s ebitda margin was negative 75.6 per cent in 2018, a loss of $1.4bn. However this was a marginal improvement from 2017, when the same figure was minus 86.8 per cent.
Note : You can happily call me a retroactivist 🙂 I’d go a stage further. I don’t really like EBITDA, as “ITDA” are also real business costs, let’s just say E, so valuation is about the PE ratio to me. Starting point is positive earnings.
On the bright side however, WeWork’s much joked-about “Community-Adjusted ebitda” margin, perhaps the most infamous financial metric of a generation, stood firm at 27.5 per cent for the year versus 26.9 per cent in 2017. This translated into $467m of heavily adjusted profits.
This continuity in one measure of profitability may not be so much of a surprise as WeWork calculates the figure in a rather non-traditional way. It takes its membership and service revenue, less revenues from noncore ventures, before subtracting “adjusted rent, tenancy costs, and adjusted building and community operating expenses”, according to a document shared with the FT.
Note : “Community-adjusted ebitda”. No, sorry, not buying it.
It is now the largest corporate office tenant in London and New York. And it carries a market valuation of $47bn, 16 times rival Regus, which, according to S&P Capital IQ data, generated $3.3bn of revenues, and $493m of ebitda, in 2018. So at some point, to justify the faith of its investors, it will need to turn off the investment taps and mature.
Note: Try to digest this for a moment. WeWork generate $1.8bn in 2018 and lost $1.9bn. Regus generated nearly double that level of revenues, made nearly 15% ebitda, yet WeWork is “valued” (note, WeWork has not had an IPO yet) at 16 times more than Regus.
Oh, and a simple business model note I made in yesterday’s post, that “their tenants are all short term in nature and many are highly vulnerable to the coming major recession (and yes, one is coming to the US, UK and beyond, the core indicators are there).”
I certainly remember the lessons of the past. Do you?