Morning Markets: In today’s boom, rare is the tech giant that makes money. And some even lose a lot. And then there’s WeWork.
WeWork, now styled as The We Company, grew quickly in 2018. The famous unicorn doubled its revenue from $886 million in 2017 to around $1.8 billion in 2018. That growth came stapled with stiff losses, however.
Let’s quickly explore WeWork’s results and try to come up with a bull case. The bear case, as we’ll see, writes itself.
Up front, here are the top-line figures that show how quickly WeWork is growing, and how much that has cost the company in recent years:
- WeWork’s 2017 revenue: $886 million
- WeWork’s 2017 net loss: $933 million
- WeWorks 2018 revenue: $1.82 billion (+105.4 percent)
- WeWork’s 2018 net loss: $1.9 billion (+103.6 percent)
That works out to a net margin of -105.3 percent in 2017, and -104.4 percent in 2018. That’s flat. So, in 2018, WeWork did not manage to materially increase its profitability despite scaling revenue by more than 100 percent.
That trend does not appear set to change. According to Axios, “WeWork President and CFO Artie Minson says to expect both revenue and net loss figures to continue growing, as the latter relates largely to upfront construction and long-term rental contract costs.”
So what we can see is not a company that sells $1 bills for $.50. Instead, over the past two years, WeWork has sold them for a little less than $0.50. That’s a great way to grow, but a difficult way to reach profitability.
Even adjusted profit metrics are struggling to grow in percent-of-revenue terms. According to CNBC, WeWork’s much-mocked “community adjusted” earnings before interest, taxes, depreciation, and amortization “margin was 28 percent last year up from 27 percent a year earlier.” In dollar terms those figures represent a large gain, as the revenue base they are levied against doubled. But, again, we’re seeing WeWork post flat profitability metrics in terms of their percent of revenue despite large growth.
Summing, revenue scale isn’t bringing much to WeWork aside from net losses scaling alongside growth. The WeWork wager, then, is unchanged in principle. It’s simply now larger in practice.
Axios included a number of positive-ish WeWork results in its piece detailing its financial performance. They include a 90 percent occupancy rate, 116 percent membership growth in 2018, and that “32% of members come via enterprise customers.” That figure, per CNBC, was up from 23 percent in 2017.
WeWork is managing to fill its spaces, and more stable corporate clients comprise nearly one-third of the seats. This provides some downturn protection. Since WeWork is nearly filled out, it has more space to lose customers without having to close venues if demand slips, and corporate clients are likely more stable than entrepreneurs and other shared-use fans in troubled economic times.
That’s about where the good news ends. If WeWork can slow its build-out and cut cost expansion, perhaps the firm can grow into its extant cost structure. That would dampen unprofitability. But WeWork can scarcely afford to stop growing, as its sky-high valuation is tied to revenue growth. (The more unprofitable a company is, the faster it has to grow to keep investors content).
And that growth will engender more losses. So we’re not looking at WeWork before it changes its tune, we’re looking at the decacorn mid-tune.
Not precisely Sara. You’d lose a lot less money doing that than what WeWork is up to.
Illustration: Li-Anne Dias.