Morning Markets: The year’s second-largest public offering could file publicly this week. Here are a few questions.
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The company previously updated its private IPO filing with the government. Its public document will be both more recent, and, critically, available for general viewing.
For WeWork, the moment represents a crucible. After dividing the market with its fast-growth, high-burn model, WeWork’s numbers will finally become wholly clear on a GAAP (unadjusted) basis. The market will get a full picture of WeWork’s financial health after a long history as a private company and some recent partial financial disclosures.
Before we ask ourselves what questions remain unanswered at the private company worth around $47 billion, here is a sketch of its 2017, 2018 and Q1 2019 financial performance.
- Revenue: $886 million
- Net loss: $933 million
- Revenue: $1.82 billion (+105.4 percent)
- Net loss: $1.9 billion (+103.6 percent)
- Revenue: $728.4 million (+113 percent)
- Net loss: $264 million ($10 million better than its year-ago Q1 net loss)
On a growth basis, WeWork has proved to be a veritable machine. Putting up nearly as much revenue in Q1 2019 as in calendar 2017 is impressive. However, the company’s unprofitability remains a possible sticking point. For example, WeWork was still on track to lose $1 billion this year if you annualize its Q1 2019 loss.
I suspect you have your own questions regarding the WeWork IPO and the company’s health. That said, here are several relatively obvious questions that myself, investors, and likely you will be on the hunt for when the document drops.
We’ll break them into a few groups. First, growth. Second, revenue quality. Third, profitability. Or, we’ll start with revenue expansion, consider the company’s gross margins, and finally think about its net results.
WeWork’s consistently +100 percent or more growth rate is impressive. I will be curious to see if the company can once again post greater than 100 percent year-over-year revenue growth in its Q2 2019 results. If so, investors will go into the company’s offering with no material decline in revenue expansion to consider. That could boost the firm’s value.
Inside that revenue growth figure, however, are different types of top line. What percent of the company’s revenue will come from recurring sources, and what portion from one-time sales? What percent of the company’s revenue stems from software, versus co-working?
Continuing, do large, more stable clients comprise a rapidly expanding percentage of the company’s real estate revenue? Are tenant churn rates rising or falling? Are occupancy rates falling, flat, or improving? And how about rent per square foot, which direction is it trending?
Those questions will help the market grok if WeWork is growing revenue through high-cost expansion of its global footprint, or if the company is also propelled through upsells and rising efficiency at its extant buildings.
This is a two-part question, I suppose. First, what is WeWork’s blended gross margin across its various businesses? And second, are smaller, high-growth portions of its business putting up strong gross margins? If the latter is true, a weaker result in our first question could be tolerated.
If that wasn’t clear, let’s try again in English: If WeWork’s revenue apart from co-working income has strong margins and quick growth, the company could argue it deserves a stronger revenue multiple than most real estate companies can command.
Finally, is WeWork’s unprofitability decreasing as a percent of revenue quickly enough to blunt criticism of its gross-dollar net losses? If WeWork’s net loss as a percent of revenue is going down consistently, investors may be less worried about total net losses. Provided that WeWork can hold net losses flat while its revenue expands, public markets could prove less worried about the company’s unprofitability than we might have expected.
A wrinkle, however. If WeWork has enormous negative free cash flow, simply holding net losses flat may not be enough for the firm to price where it wants to. Flipping that around, if WeWork’s free cash flow is improving, a flat net loss and quick revenue growth could be the loose ‘path to profitability’ that investors will want.
Growth, of course, would need to be quick for that scenario to hold up.
We’ve avoided asking what WeWork may be worth, and whether it will live up to its private-market valuation. That’s because there’s little point at this junction. We’ll see the numbers, run the multiples, make the comparison to public comps, and then see what investors are considering regarding a per-share price interval.
It’s up to them, not us. More when we have the filing.
Illustration: Dom Guzman.
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