The collapse of WeWork's attempted IPO – the firm once valued at $47 billion but now at the brink of bankruptcy – marks the end of an era, according to Mike Wilson, Morgan Stanley’s chief U.S. equity strategist. According to Wilson, investors have showed that they are no longer willing to accept financial excess in a market that until now has paid eye-popping valuations for unprofitable IPOs and tech companies in general.
Value of Unprofitable Businesses at Risk
On Monday, The We Company, the parent company of popular co-working space WeWork, said it would withdraw its S-1 filing and put a halt on its IPO plans. This came just one week after the SoftBank-backed startup ousted its founder and CEO Adam Neumann.
The Morgan Stanley analyst compared WeWork’s IPO failure to other corporate events that took place during the height of secular trends over recent decades. These include JPMorgan Chase & Co.'s (JPM) takeunder of failed Bear Stearns investment bank in 2008, which marked the end of the financial excesses of the 2000s. He also drew parallels to the failed AOL-Time Warner merger that occurred at the height of the dotcom bubble, and the failed leveraged buyout of United Airlines Holding Inc. (UAL) that ended the MBO frenzy in the 1980s.
"In our view, the days of generous capital for unprofitable businesses is over," wrote Wilson. "The failure of We Company to go public is reminiscent of past corporate events that were widely seen as marking important tops in powerful secular trends."
Wilson also said this means trouble for sectors such as enterprise tech and other high growth software stocks, and will put pressure on the broader market. Stocks most at risk include those that have driven the market to highs in the recent years, as investors move away from momentum and back into value. While he notes that some publicly-traded names “still need to fall back to earth,” he says that there may not be much more downside ahead, and that these stocks will also rebound.
"It was one heck of a run, but paying extraordinary valuations for anything is a bad idea, particularly for businesses that may never generate a positive stream of cash flows," said Wilson. "The most speculative and inappropriately priced areas of the market have begun to break down."
The repercussions are already being felt by newly public companies such as Uber Technologies Inc. (UBER), Lyft Inc. (LYFT) and Peloton Interactive Inc. (PTON), which are all down from their initial IPO prices.