WeWork owner The We Company published detailed financial statements for the first time on Wednesday, revealing breakneck revenue growth and soaring losses, as it prepares for an initial public offering as early as next month.
The IPO, which could raise several billion dollars, will be a key test of investor appetite for fast-growing, money-losing start-ups, at a time when global concerns about the potential for recession and the trade war between the United States and China are fuelling stock market volatility.
Other high-profile IPOs this year, such as those of ride-hailing start-ups Uber Technologies Inc and Lyft Inc , have fared poorly after their launch, amid investor scepticism over their lack of a concrete plan to profitability.
"Large money-losing IPOs with high valuations tend to be challenging in the IPO market," said Kathleen Smith, founding principal at IPO research firm Renaissance Capital. "IPO investors have already been burnt by Lyft and Uber. They are going to be cautious about WeWork."
One of the risks We Company investors have to grapple with is a mismatch between the company's cash flow and liabilities. It rents out workspace to clients under short-term contracts, even though it pays rent for them itself under long-term leases.
"This is going to be an extremely volatile stock. Investors will debate whether this is a company that has a niche that's going to be very profitable, or if this is an overvalued real-estate company fraught with risks," said Jay Ritter, an IPO expert and professor at the University of Florida.
We Company, co-founded in 2010 by its chief executive, Adam Neumann, said in a filing with the US Securities and Exchange Commission that it lost more than US$900 million in the first half of 2019, up 25 percent from a year earlier, even as its revenue doubled to US$1.54 billion.
The company is considering looking to raise US$3 billion to US$4 billion in the IPO and could launch its IPO investor road show the week after the US Labor Day public holiday on Sept. 2, according to a person familiar with the matter.
We Company's revenue has surged as the company shakes up office leasing by offering start-ups and entrepreneurs short-term contracts in lieu of traditional long-term leases. It also generates greater revenue per square foot than traditional landlords, by squeezing more workers into a property.
This has not yet translated into profits. As it continued to sign new leases at a rapid rate, We Company burned through US$2.36 billion in cash in the first half of the year, more than twice the amount it spent in the same period last year.
The company did not give a time frame for becoming profitable. After the IPO, Neumann, 40, will retain more than 50 percent of the company's voting power, leaving him with operational control of the business.
This practice among startups has received some criticism from some IPO investors, who argue it undermines corporate governance.
Neumann has not sold any shares of the company since October 2017 and does not plan to not sell shares in the IPO, We Company said in its filing.
We Company also disclosed it paid almost US$17 million between 2016 and 2018 for leases on properties owned by Neumann.
Aggressive expansion
We Company, which operates 528 locations in 111 cities across 29 countries, said it expected to "expand aggressively in our existing cities as well as launch in up to 169 additional cities."
It was valued in January at US$47 billion in a private fundraising round, according to data provider PitchBook. Its biggest backer is Japan's SoftBank Group <9984.T>, which has invested or committed to invest US$10.65 billion since 2017.
Flexible office providers have dominated leasing in major gateway cities, most notably London, New York and San Francisco, a sign of growing demand by companies and not just the start-ups and entrepreneurs that put coworking on the map.
We Company also said it had obtained a new credit facility from a group of banks providing up to US$6 billion to further fund its growth. Credit ratings agency Fitch Ratings downgraded WeWork's debt rating deeper into junk territory on Wednesday, citing underperformance relative to expectations at the time of the initial rating.
We Company has not yet disclosed how much it is looking to raise in the IPO and what valuation it will aim for. It intends to list under the symbol "WE."
J.P. Morgan Securities and Goldman Sachs are among a nine-member underwriting team for the IPO.
