In July of 2018, the FT punched back at WeWork’s valuation. CEO and cofounder Adam Neumann crafted a fantastic narrative to support a lofty $20 billion valuation claiming that WeWork is a “community” and a “state of consciousness” that brings people together to “change the world.” In contrast, the FT reported:
WeWork’s claim to disrupter status in serviced offices also requires scrutiny. The existence of older providers such as IWG is the elephant in the office. Like them, WeWork has a business model underpinned by unglamorous property market arbitrage: leasing offices, fixing them up and renting them out at a higher rate. If the groups are fundamentally the same, it makes no sense to value WeWork at $20bn — more than 10 times expected sales.
IWG is the world’s largest serviced office provider, with more than 10 times the number of offices and a profitable business model. Yet it has an equity value below $4bn. This values IWG at 1.2 times forward sales. If valued at the same multiple, WeWork would be worth around $2.7bn.
The word that should leap off the page is “profitable.” WeWork could not be compared to IWG based on profitability because it was on schedule to lose $1 billion annually at the time of this analysis. Well, not on any standard measure of profitability. Which brings us back to “community adjusted EBITDA,” which the FT skewered.
By stripping out almost every cost — from advertising to those associated with setting up new offices — this figure was positive at $233m last year. [CFO Artie Minson] says he received no pushback from investors. But such flattering bespoke measures of profits remain a red flag for many investors. Online coupon site Groupon abandoned its own individual measure after attracting negative attention. WeWork would be wise to do the same.
Note: This article is a terrific read.