WeWork's IPO price has been reported from $47B to $20B or lower. What will it really be, and why is there such a wide range of possible valuations?

Update, March 18 2020: This article was written before WeWork withdrew its IPO prospectus—the situation has changed significantly since then, and will likely continue to. This piece represents our thoughts on the matter as of the publication date and will not reflect any new developments.

As you probably know, WeWork was expected to kick off its IPO this September. But its reported “$47B valuation” was met with skepticism, then rumors of a $20B+ reduction in value in September, an indefinite pushback on the debut until “sometime this fall,” and finally, the CEO's resignation under board pressure. (Note: after we published this piece, WeWork announced that they were withdrawing their IPO prospectus entirely, likely until next year.) As a result, there’s been a lot more discussion of WeWork and valuation in the media than we usually see. How do you (the public) believe and trust in a company when there is such a swing in its perceived value?

The answer is that valuation is the quantification of a perspective, or simply put: storytelling with numbers.

By finding the levers that drive a company’s performance and considering a range of possible situations, analysts produce a corresponding range of valuations and identify the one they believe to be most likely. At an initial public offering (IPO), they are also trying to anticipate how investors, both current and future, will respond to any given valuation (or story).

So, to clear things up, we’ll explain where these numbers and implied assumptions come from. Let’s go beyond the big (and sometimes misleading) headlines and do a deeper dive to answer a (maybe simple) question.

What Is WeWork’s Valuation?

To perform a valuation, an analyst starts by identifying the factors that drive value — what does it cost a company to produce sustainable value (and profit), and how do the revenue and related costs trend? How are they expected to trend? For WeWork, this essentially translates to the number of workstations and square footage it rents out, the cost to expand those numbers, and the cost to continue renting them out once they’re available.

Note #1: The We Company or WeWork (terms we’ll use interchangeably) is not a client of ours, directly or indirectly. The information provided here is from WeWork's recently published S-1. We will footnote the provided data at the bottom of this article in the form of page number references to the S-1.

As of June 30, 2019, the company generated $2.59B1 in revenue by operating 600K2 workstations across ~30M usable square footage3 of its “product,” operating at a blended gross profit margin of ~13%4 and an EBITDA margin of -75%.

We believe that WeWork’s valuation, as of June 30, 2019, depends on a few main factors.

Note #2: In our analysis, we refer to “breakeven” or “profitability.” We mean “optional” or “adjusted” breakeven or profitability. High-growth companies don’t optimize for profit; they optimize for dominance. For example, Amazon and Google continue to be high-growth companies as they choose to invest in their growth. They could be wildly more profitable if they chose to be. Similarly, although WeWork does not have to be profitable or breakeven, it needs to have full control to do so, given stronger and proven unit economics.

The driving forces of WeWork’s valuation will be:

What will the company’s projected revenue be in the near-term (2020), mid-term (2024), and long-term (2030) future?

Will the company be able to arrive at profitability quickly (i.e. by ~2022)? or

Will it take the company longer to arrive at profitability (i.e. by 2025+)? And

Can the company reach and maintain a 12.5% profitability by 2030, with a 25% gross profit margin, and continue to grow at a 10% rate indefinitely?

Depending on a combination of assumptions, the company would be valued today as high as ~$100B or as low as ~$20B:

1. The enterprise value would be $97B

if you believe it can grow rapidly and quickly become operationally profitable and stable.

i.e:

By 2022, the company will generate $16B in revenue by operating 2.8M workstations over 157M square feet and reach breakeven. (Note that 157M square feet is an area roughly the size of Cambridge, MA.)

By 2024, the company will generate $35B in revenue by operating 6.2M workstations over 341M square feet and maintain its breakeven. (Note that 341M square feet is an area roughly the size of Berkeley, CA.)

Further, it’s able to reach $100B in revenue by 2030, and operate at a blended gross profit margin of 25% and an EBITDA margin of 12.5%, and grow at similar margins and a growth rate of 10%, indefinitely. (For reference, Google, the company that arguably has a monopoly on internet search, has had an annualized revenue growth rate of 18%–22% per year over the past five years, with similar revenue of $100B revenue per year since 2017).

2. The enterprise value would be $55B

if you believe it can grow rapidly but it’ll take time before it becomes operationally profitable and stable.

i.e.:

By 2022, the company will generate $11B in revenue by operating 1.8M workstations over 100M square feet and will continue to lose money at over negative 30% EBITDA.

By 2024, the company will generate $27B in revenue by operating 4.7M workstations over 262M square feet and reach near breakeven.

Further, it’s able to reach $95B in revenue by 2030, and operate at a blended gross profit margin of 25% and an EBITDA margin of 12.5%, and grow at similar margins and a growth rate of 10%, indefinitely.

3. The enterprise value would be $29B

if you believe growth will slow but the company will quickly become operationally profitable and stable.

i.e.:

By 2022, the company will generate $9B in revenue by operating 1.5M workstations over 84M square feet and reach breakeven.

By 2024, the company will generate $19B in revenue by operating 3.3M workstations over 184M square feet and reach near breakeven.

Further, it’s able to reach $77B in revenue by 2030, and operate at a blended gross profit margin of 25% and an EBITDA margin of 12.5%, and grow at similar margins and a growth rate of 10%, indefinitely.

4. The enterprise value would be $21B

if you believe growth will slow and it’ll take time before the company becomes operationally profitable and stable.

i.e.:

By 2022, the company will generate $9B in revenue by operating 1.5M workstations over 84M square feet but continue to lose money (negative 70%–20% EBITDA margin between 2020 through 2023).

continue to lose money (negative 70%–20% EBITDA margin between 2020 through 2023). By 2024, the company will generate $19B in revenue by operating 3.3M workstations over 184M square feet and reach near breakeven.

Further, it’s able to reach $77B in revenue by 2030, and operate at a blended gross profit margin of 25% and an EBITDA margin of 12.5%, and grow at similar margins and a growth rate of 10%, indefinitely.

And finally, the enterprise value would be much lower if you don’t believe the company will be able to maintain this level of growth or you do not see a path to becoming operationally profitable or stable.

Any of these situations is possible, which is why there appears to be a wide bracket of available numbers. WeWork’s (implied) argument in its IPO prospectus is that they would be able to continue to grow rapidly for the foreseeable future with the ability to get to strong unit economics in the mid-term future, even though they won’t be operationally profitable. This would result in a number roughly between scenario #2 and scenario #3 above.

As investors took a closer look at WeWork’s S-1, however, it seems there are clear uncertainties around the company’s ability to achieve scenario #2. The general perception points to a scenario between #3 and #4 (or worse). So, when an investor balks at a valuation like this, it’s not a response to the sticker price itself; it’s because the valuation makes assumptions (implicit or explicit) that are unreasonable.

It is nearly impossible for the company to continue its aggressive growth and get a hold of its expenses. The problem is not just that it’s losing almost $2 for every $1 it makes. It’s that it will have to do this for at least the next five years and rack up billions more in losses. Even then, there is no guarantee that the global economy will continue to grow, that competitors won’t put more pricing pressure on WeWork, or that dozens of other major concerns won't stand in the company's way.

Ergo, the $47B reported valuation figure is inherently not a true valuation. So let’s address what all those headlines have been saying about the company’s reported “$47B valuation.”

What We Know

Generally speaking, a valuation becomes “established” when a round of financing includes both a new AND broad set of institutional investors. The last time this happened was in 2016, where investors including J.P. Morgan, Benchmark, Fidelity, and other investors purchased $690.6M of the company’s Preferred Series F at $50.19 per share5. Our estimate of the company’s cap table at that date included 161M shares of Class A and Class B, as well as 137M of Preferred Stock, for an estimated total of 298M shares or a ~$15B post-money valuation. This is the last “reliable” data point where a broad group of investors has validated the value of the company. (As we’ve written before, the price of a preferred round of financing is misleading, but we’ll consider this for the time being and for the sake of conversation.)

Since 2016, WeWork has only seen two broad-based stock purchase events (“Tender Offers”) that would imply a valuation, both of which included stock purchases by SoftBank.

2017 Tender Offer:

In 2017, in conjunction with the Series G investment of $51.81/share by SoftBank, SoftBank purchased 30,839,754 shares of various classes for $1.7B, or $42.15/share6. At an estimated total capitalization of 307M share, this implies an estimated valuation of $13B.

Given this was a broad-based acquisition, we can place reliance on the $42.15/share and the $13B valuation. Said differently, SoftBank’s cost basis would be around $42.15/share.

WeWork share distribution by class at 2017 Tender Offer

2019 Tender Offer:

Then in 2019, in conjunction with a series of convertible note financing by SoftBank, SoftBank purchased 18,518,518 shares for $1.0B, or $54.00/share7. At an estimated total capitalization of 340M shares, this implies an estimated valuation of $18.37B.

Said differently, SoftBank’s cost basis would be around $54/share.

WeWork share distribution by class at 2019 Tender Offer

Between these two events, we have a history of the value that buyers and sellers were willing to trade at various points in the company’s history, which is a good place to start in understanding how they would think about current and future performance.

Assuming the $18.37B figure as “true” we can compare WeWork’s past performance and future revenue forecast to the $18.37B, specifically as of 12/31/2018:

If we know that its last twelve month revenue was $1.82B as of 12/31/2018, we can justify saying that “investors value each dollar made over the last twelve months at 10 times, or ~10x ($18.37B / $1.82B 8 ).”

).” If we estimate that the twelve month revenue from a projected six month as of 12/31/2018 would've been estimated at $2.59B, we can justify saying that the “investors valued each dollar generated and to be generated at 7 times, or ~7x ($18.37B / $2.59B9).” If we estimate that its next twelve month revenue as of 12/31/2018 would have been reasonably estimated at $3.66B, we can justify saying that “investors valued each dollar to be made over the next twelve months at ~5 times, or 5x ($18.37B / $3.66B10)”.

Is the 10x historical revenue for which SoftBank purchased shares reasonable? How about 7x trailing twelve month from a projected six month point? What about 5x next twelve month revenue multiple? Let’s investigate.

Revenue, Workstations, and Past Revenue Multiples:

For the three years ending December 31 2018, WeWork has doubled its revenue every year, from $436M in 2016 to $1.8B11.

For the year ending June 30, 2019, WeWork has generated $2.59B and is well on its way to generate $3.66B for the year ending December 31, 2019, in line with its 100% year over year growth.

We also know the company’s revenue is directly and highly correlated with the number of workstations it has available, as it has also doubled its workstations every year, from 107K to 466K12. It’s possible WeWork will diversify its revenue, but at the moment, there is no evidence to suggest that much of the company’s value will come from this.

For the year ending June 30, 2019, WeWork has a workstation capacity of 600K13. Based on its historical performance and its “Find, Sign, Build, Fill, and Run” cadence and projections, it is our estimate that by June 2020, the company will have 1M14 workstations generating $5.3B15 in revenue.

Using the above SoftBank-implied revenue and projected revenue multiples (10x, 7x, and 5x, for trailing twelve month, trailing twelve month from a projected six month data point, and next twelve month, respectively), and calibrating the valuation to the 6/30/2019 performance, we arrive at the following:

Revenue Multiples: Method 1

6/30/2019 trailing twelve month (calculated based on reported figures): $2.59B

At 10.08x trailing twelve month revenue = $26.12B

Revenue Multiples: Method 2

12/31/2019 trailing twelve month (calculated based on six month reported and projected figures): $3.66B

At 7.08x twelve month revenue from a projected six month data point = $25.94B

Revenue Multiples: Method 3

6/30/2020 trailing twelve month (calculated based on projected figures, based on workstation rollout): $5.33B

At 5.02x next twelve month revenue = $26.75B

Average of three figures: $26.3B

In such a framework, we would estimate that, as of June 30, 2019, a high-end valuation, given the same information available to WeWork and SoftBank, using a consistent methodology and framework that would fit the previous investments, would result in a value of $26B, from the perspective of SoftBank, the only major buyer in the 2019 Tender Offer.

Public Markets’ Revenue Multiples

Selecting the right comparable here is critical. If we select a very direct comparable in the real estate and office business space, like Regus, we assume investors would value WeWork at about 1.5 times its revenue. WeWork is trying hard to establish itself as an organization with large revenue and geographical footprint and scale, with a strong brand, product quality and loyalty, and location density/penetration as its winning differentiators. To that end, there is an argument to classify WeWork similar to a “platform” company, and estimate its value by comparing its revenue multiple to that of a Lyft or Uber (~4x–5x revenue multiples), and this will still require much imagination, and has many shortcomings.

In such a framework, we would estimate that, as of June 30, 2019, a moderate valuation, given how the public markets are treating other similar “platform” companies, would result in a value of $11B–$13B.

However, over the past few months, major news agencies have repeatedly reported WeWork’s valuation figure as $47B.

Who are the “Winners” at the reported $47B valuation?

WeWork’s M&A Department

Since January 2019, the company has gone on to purchase eight entities: Euclid, Managed by Q, Islands, Prolific Interactive, Waltz, SpaceIQ, and Spacious. These represent almost half of its 18 reported acquisitions to date. Not all the details of these transactions are public, but those that are show they have been transacted at the $110/share value (i.e. the $47B valuation). We have written about the implications of selling your company and receiving the stock of a private acquirer before.

In other words, the WeWork M&A Department was presumably able to negotiate with a much inflated currency (i.e. the WeWork stock) to complete its various transactions. (More on this later.)

Who are the “Not Winners” but “Not Complete Losers”?

Most Employees

As of December 31, 2018, the company had 35.7M options outstanding with an average exercise price of $14.37. Of those, 19.7M are vested and exercisable with an average exercise price of $7.34. WeWork has at least $10B in senior security liquidation preference that represents 51% of the capitalization table. But more senior investors’ securities may have come with “blocking rights,” i.e the ability to block the public offering if the IPO price is not at least as high as (or greater than) the last priced round. Unless the IPO valuation is firmly above ~$20B ($10B / 51%), the more junior stockholders will not see the public markets, but that would be an unlikely scenario, since the more senior investors may block an IPO below the last round of private financing.

Adam Neumann

WeWork’s CEO owns 2,428,730 Class A shares and a whopping 112,507,37116 shares of Class B stock. This roughly represents 28.5% of the outstanding stock. Additionally, in the run-up to the IPO, he was awarded 42.47M shares of Preferred Class B on a time-based and milestone-based vesting schedule with a purchase price of ~$37/share17:

16.4 million would vest over five to seven years, 9.4 million would vest over five years once the IPO is completed. 7.078 million would vest monthly over three years once market cap is above $50B, 7.078 million would vest monthly over two years once market cap is above $72B, and 9.438 million would vest monthly over two years once market cap is above $90B.

With such a sizable piece of the cap table, we can safely say Neumann will make significant money.

However, the $47B valuation has some clear downside implications here. More than 33M shares (#2 through #5 above) are effectively “pegged” to a market cap that needs to be significantly above the $47B mark. That’s 7% of the company’s entire cap table that will be payable only if WeWork's valuation as a public company is at and then above the $47B figure sometime in the next ten years. A significantly lower IPO price may make that level of success much less likely.

More importantly, as of this writing, it seems that he will stepping down as CEO, so the high valuation seem to be irrelevant. Arguably, no person will have higher monetary incentive, emotional investment, or historical context of the company (and the same could've been said for both Travis Kalanick and Steve Jobs upon their departure, so this argument doesn't have much merit without further analysis).

However, we're unclear if a new CEO could pull off the "magic trick," as in:

they need to make WeWork become "tech-company" profitable, while growing 100% year-over-year, while requiring to spend massive amount on capital expenditure, while running on ice-thin margins, while in the 10th year of a Market Bull Run - the longest recorded in history).

Needless to say, he has created and captured billions of dollars of value for himself and many around him.

Possible “Losers”?

Managed by Q

In April 2019, WeWork acquired Managed by Q for a total reported purchase price of $220.0 million, which was paid with $100 million in cash and the remaining with WeWork’s Series AP-3 Acquisition Preferred Stock with a per-share price of $110/share, or 1,090,909 shares of Series AP-3 Acquisition Preferred Stock. Unless these securities have major anti-dilution and downward protection clauses, it would imply that if the Managed by Q team had a target valuation of $220.0 million, they have single-handedly “approved” a $110 / share price in exchange for their company. At the rumored $20B valuation or our calculated $26B valuation and without further downside protection, they have effectively collected $52–$67/share, or $56M–$73M (vs. the reported $120M in equity value).

SoftBank

SoftBank has extended at least $5B in the form of convertible debt or straight loans with warrant features that convert into Series G-1 securities. The Series G-1 has a conversion price of $110/share, which would imply a valuation north of $40B.

An IPO and the eventual conversion of the Preferred Security rarely (if ever) would trigger an anti-dilution clause. This means the conversion price would remain at $110/share, and the invested $5B would convert to many fewer shares of common stock, as opposed to waiting and purchasing these shares at the (presumably) lower, open market price.

However, it is likely that the Series G-1 holders will have a blocking right. Based on a study by the law firm Fenwick & West, 30%–40% of IPOs in the past 4 years included such a right.

These negotiations are often complex, and may include many other facets of the business and the relationship. What we don’t know is the level of downward protection the Series G-1 has, SoftBank’s leverage and involvement in the ARK program (WeWork’s real estate acquisition and management platform, if any), SoftBank’s leverage in the Joint Ventures in ChinaCo, JapanCo, and PacificCo, and other legal and economic matters that (maybe?) are currently and will continue to be discussed behind closed doors.

So, Is $47B Way Too High?

The reported “$47B valuation” has been a bit of a misconception. It’s not a supported valuation. It’s actually the “high water mark” that the valuation needs to reach for the Series G-1 to profitably convert to common stock. Most investors who have purchased other securities, employees or contractors who have been granted stock options, or many companies that have been acquired in exchange for shares have come into the position of such shares at a price per share that is much less than $110. Because of their lower price per share, they will mostly do fine, ok, good, or great. Value has been created and captured.

Various investors who have invested over the years may have different opinions about the value of their positions. The current valuation practice for many investors is to “keep at cost” or “mark to the next round.” This means that if there is no additional signal, they will keep the value of each of their shares at the last round of financing. If there is a new round of investment (similar to the Series G-1), they would “write-up” the value of their previous investment to that higher number. At $47B, for example, a Series F investor who purchased shares at ~$50/share may “write up” their position to $110/share. We believe that this would be a gross misrepresentation of their position, by at least 80%.

A risk-adjusted waterfall analysis (that is, an analysis of the company’s overall value and the subsequent allocation of said value, given the facts of the cap table and realistic assumptions around possible exits) would result in a much more reasonable and supportable value. Based on the company’s S-1 and the various analyses above, we have estimated the per-share value of each class, after the Series G-1 investments, as follows:

We have a good sense that our valuation technique and conclusions are close to that of WeWork’s own third-party valuation firm, given that we have arrived at a value for the Series G-1 equal to the transacted price of $110/share in our allocation structure, and our value allocation to the Common Stock Class A is $37.08, almost identical to what was reported by WeWork at $37.0318. In our estimate, most of the earlier shares (Series A through D-2) range from $37 to $41, with the Series E through G ranging from $48 to $65.

What Happens Now?

Valuing the private stock of high-growth companies ranges from difficult to confusing. As analysts, we usually get conflicting signals, transactions in the capital stock of these companies usually involve strategic partners who have motives that don’t impact other shareholders, and the legal and economic rights of the shareholders are nuanced and require expert analysis.

In the case of WeWork, investors need to believe in a “magic trick:” to grow exponentially over a long period of time and achieve great unit economics and sustainable, optional profitability. We call this a magic trick because companies usually sacrifice one for the other. Only in very rare cases can companies can achieve both. Based on our analysis, it seems unlikely at best for WeWork to succeed at it.

Even after delivering over 4,000 valuations, we can’t say we’ve seen it all. But we’ve definitely seen it most. If you’re in need of a valuation for the private stock of a company, we’d love to chat and would be happy to help.

The figures presented in this report are not meant to be relied on for tax reporting, financial statement reporting, or other reporting or transactions purposes.

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All Citations from WeWork’s S-1, filed August 14, 2019.