Why WeWork May Be the Next Casualty of the 2019 IPO Meltdown

Investors' punishment of loss-plagued IPOs this year has soured the public offering market. At the same time, it has boosted the odds that The We Company, the unicorn valued at $47 billion with major financial losses, may see its shares drop sharply when it goes public, as outlined by The Wall Street Journal.

What Is The We Co.?

The We Company, the parent company of WeWork, is at its core a co-working network. Its primary line of business is to lease properties and turn them into community spaces to rent out to freelancers, startups, entrepreneurs, and now some large businesses.

The New York City-based company, now the single largest office tenant in New York, lost $1.9 billion last year, more than Uber Technologies Inc. (UBER), on $1.8 billion in sales. Like other members of the class of 2019 IPOs, WeWork has been using creative accounting similar to IPOs during the dotcom bubble by suggesting that it should be treated like a tech firm. Many are skeptical of the company’s invention of a new profit metric called “community-adjusted Ebitda.” That metric changed WeWork's $1.9 billion loss, one of the largest ever for a startup, to a $467 million profit.

Unicorns Employ Unconventional Accounting

While many of the mega-unicorns, including the ride sharing companies, Airbnb Inc., Spotify Technology (SPOT) and others, have cited their long-term potential to completely disrupt traditional industries across entertainment, transportation, hotels, and more, they are also notorious for losing historic amounts of money, per the Journal.

For example, Uber and Lyft Inc. (LYFT) see their total market potential as high as $1.4 trillion, that of the entire transportation industry, while bears view the firms as not much more than an expanded cab service.

Uber, which went public on Friday, posted a whopping loss of $3.7 billion in the 12 months ended March. Yet by the measure of a new accounting metric that the company says better gauges performance, called “cored platform contribution profit,” Uber says it made $940 million last year versus a $3 billion operating loss, per the Journal. Uber’s biggest U.S. rival, Lyft, generated a loss of $911 million in 2018, yet by its measure of “contribution” profit, it made $921 million.

Public Investors Not Buying It

While Uber and Lyft surely aren’t the only companies that have created unconventional metrics to better reflect their business health and potential, investors aren’t buying their new accounting.

“The early investors are trying to find some sucker who will buy the stock in the public market,” said Howard Schilit, a forensic accountant known for detecting accounting tricks, to the Journal. “In order to sell the deals, they make up a fact pattern that is nonsensical.”

Uber shares have fallen 8.3% from their IPO price as of Wednesday close. Meanwhile, Lyft has seen its share price decline nearly 20% from its IPO price in March.

It’s important to note that just because Uber and Lyft’s shares have dipped since their IPOs, it doesn’t mean they can’t make a stellar comeback like tech star Facebook Inc. (FB), once down far from its IPO price. That being said, their recent weakness has created a less ideal market for newcomers with similar issues, at least in the near term.

Accounting aside, The We Company is growing extremely fast, up from 186,000 members in 2017 to 466,000 members in 2019 in nearly 500 locations around the world, per a CNBC video.

This kind of growth is what entices private investors to continue to funnel money into these next-gen startups, supporting growth at all costs. Yet public investors have shown that they require a stronger numbers-based narrative on how these companies’ loss profiles will improve, and are demanding to see a clearer pathway to profitability.

Looking Ahead

To be sure, WeWork’s bulls cite the company’s key differences from struggling ride sharing companies Uber and Lyft and other highly valued firms operating in the red.

The We Company, which rebranded itself from WeWork earlier this year, views itself as developing into a larger and more diversified tech company that capitalizes on the cultivation of community, from education, to housing, work, and pervading all facets of life.

Alongside its co-working memberships, The We Company has doubled down on housing, creating WeLive co-living arrangements, as well as education via WeGrow, a for-profit pre-K and elementary school in New York that focuses on conscious entrepreneurialism and plans to spread across the globe. The We Company has also indicated that it wants to get into banking, and recently announced its new $3 billion real estate investment fund called Ark, focused on buying up properties.

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