At the beginning of this year Softbank bought a further $2bn of shares in a business whose primary revenue earner is in the rental of shared office space that allows small businesses to make the use of office space at a lower rate than your usual real estate business model.
In essence what it does is it buys unused office space and then rents it out into smaller units to start-ups or small businesses, for a much lower cost, than would traditionally be charged by a normal landlord.
The company offers several pricing options to larger businesses, as well as individual workers but all the while with a view to providing the benefits of a full office environment while reducing the costs for businesses, where margins tend to be wafer thin.
It is certainly true that the shared office space business model is a successful one, given that Workspace Group here in the UK has seen significant growth in the last ten years.
The valuation of Workspace Group however is much more modest and more importantly the company is profitable.
The WeWork or the We Company as it is now known has more grand ambitions.
As part of the extra $2bn cash injection by Softbank which valued the business at an eye watering valuation of $47bn the company would be spilt into three divisions with WeWork the largest part of the business.
The other two divisions would be WeLive, which provides spaces for co-living, and WeGrow which would be an education provider.
Today’s S1 filing appears to fire the starting gun on a roadshow that will look to generate between $2bn to $3bn of extra funding, at a time when the IPO flurry that we saw at the beginning of this year appears to have run its course.
As Uber can attest a lofty valuation and a popular business model doesn’t always translate into a realistic valuation and looking at WeWork’s numbers it is hard to make a case for the type of valuation that we saw at the beginning of the year.
On the numbers in the six months to the end of June the company generated revenue of $1.54bn, almost double over the same period a year ago. So far so good, unfortunately its operating expenses were $2.9bn, which saw its operating losses rise to $1.37bn.
There is no question that every business requires capital in order to grow the business, however in the space of the last few years operating expenses have shown no signs of coming down, with last year the company making a pre-tax loss of $1.93bn. This year alone the company is down just under $900m and in terms of cash flow the company burns through cash as quickly as it generates it.
In terms of the growth numbers, workstation capacity has doubled to 604k, while memberships were up 97% to 527k.
The S-1 doesn’t give any indication as to what price the company is looking to price its IPO, but given the current mood in the market, there is risk they won’t get anywhere what they are looking for price wise.
At $47bn the valuation looks a little rich and they may find, just like Uber, they may have to settle for a lot less, especially if markets continue to behave on the erratic way that has characterised the past few weeks.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination