Last week, WeWork announced that it had confidentially filed to go public, with plans to debut next month. It is an anticipated IPO indeed. The company, now operating as the “We Company” houses its co-working spaces, as well as its new ventures including WeLive and Rise by We.
With this announcement, WeWork joins the ranks of a number of other notable startups that are entering (or have entered) the public market this year. 2019 is undoubtedly a hot year for IPOs – we’ve already seen 58 debut since January.
Q1 hedge fund letters, conference, scoops etc
But like many stocks on the public market, not every IPO is created equal. And while WeWork may have the hype behind its public market debut, we believe it’s not an investment worth backing. There are other companies that have debuted this year that offer a much better option for long term investors seeking to get in on these newly public companies.
There are a number of reasons to not be pro-WeWork’s IPO. The first is that despite being valued like a high margin internet company, WeWork’s success is based on a traditional landlord-style business model. Real estate has never been a high margin business, and WeWork’s business model does not reinvent the landlord/tenant relationship. Rent obligations are high and profit margins are slim, as reflected in WeWork’s filings.
Second, the company has generated, and continues to generate, massive losses. Last year, WeWork reported losses of nearly $2 billion, a number nearly double from the year prior. To an investor, this is a troubling number. Yes, many companies debut on the public market with great losses – think Amazon or Facebook. But the difference between those companies and WeWork is the underlying fundamentals that support long-term viability in the former and not the latter. Most companies debut on the public markets having slimmed their losses, even if those losses remain large. A growth in losses is a concerning trend.
Additionally, WeWork’s landlord/tenant relationship is muddied by the conflict of interest that exists because WeWork’s CEO and co-founder, Adam Neumann, who owns a number of buildings that WeWork rents floors from to operate its co-working business. This transaction does not seem like an arm’s length deal and could be problematic for a public company. If the CEO of WeWork is leasing a building on behalf of the company from himself, who is to say that it is a fair price? This could be considered self-dealing.
This ripe IPO market includes a number of companies that, unlike WeWork, present more optimal investment opportunities. Pinterest, for example, presents a unique opportunity for investors to get in on the ground level of a company that is redefining the way consumers shop online. The company has also developed high-margin ad products, a la Facebook, without directly competing with the behemoth. It’s very typical for users of other social media platforms to also be active users of Pinterest. This, coupled with a 60% revenue increase year over year in 2018 and narrowed losses, positions the company for meaningful growth that will impact the stock and its performance over the next few years.
Zoom is another strong IPO. A videoconferencing company, the stock debuted in April 2019 and unlike many other deemed “unicorns,” had limited losses to the breakeven point in their latest fiscal year. Curbing losses in conjunction with its public market debut makes Zoom especially attractive as it continues to grow its revenue and turn a profit.
In the IPO pipeline is Slack, which will go the direct listing route. The company unveiled its plan for an IPO late in April. Like WeWork, Slack has generated a lot of hype and has become a common name within both startups and established businesses alike. But Slack differs in its business structure – the messaging platform offers a high gross margin product that only increases in profitability as more users sign on. Customer growth at Slack has also been impressive – nearly a 50% increase last year from its previous year – and there’s exponential room to grow. These factors make this upcoming IPO one of very high interest.
Investors are graced with a number of IPOs this year. WeWork’s debut is more celebration than substance and, with so many others to choose from, is worth passing on.
David Miller is senior portfolio manager of the Catalyst IPOX Allocation Fund (OIPIX).
