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Not trolling, really don't understand how WeWork is valued at 35 BILLION when they don't even own the real-estate properties that they are leasing. How is this

Not trolling, really don't understand how WeWork is valued at 35 BILLION when they don't even own the real-estate properties that they are leasing. How is this absurd valuation -- or for that matter, even the 17 BILLION previous valuation -- justified esp considering (according to the article) they are losing money ? > The company’s bond offering documents showed fast-growing sales but even faster-increasing losses. WeWork had total revenue of $886 million but a net loss of $933 million in 2017, according to the documents.

swampthinker 8y ago
Net loss, holy cow. $1.8B burn on $900M in revenue.
- acchow 8y ago
  The general strategy must be undercut the market to buy market share, and then transform the market entirely. I don't understand the precise mechanisms in the case of WeWork (it's not as clear as, say, Uber + self driving cars). Can someone explain?
  - enraged_camel 8y ago
    They bought Meetup recently so maybe they are planning some sort of synergy?
    - toasterlovin 8y ago
      I just received an email from them touting the ease with which I can rent space from them (free for some introductory period) for the meetup I run. The problem is that many (most, I'm guessing) meetups are funded by an individual. Unless their space is drastically less expensive than a lot of the alternatives I found when trying to find a space for my meetup, nobody is going to be able to afford to use their space.
georgespencer 8y ago
As someone else has pointed out, not owning the real estate is part of the reason for the high valuation. A good franchise business will force the franchisee to buy the real estate and give the franchise the opportunity to buy the real estate at a fixed cost (either fixed outright or a multiple of revenue for the location), effectively giving them no downside on capital depreciation on the site (i.e. the value of the site going down) or the ongoing dilaps costs. They only have upside: they can buy the site if it's doing really well. And meanwhile, you're buying your training, goods, services, and paying a portion of your revenues to the franchise. WeWork is like a franchise which has no interest in owning your real estate. They and others have realised the opportunity to take advantage of a couple of factors in the macro (more fluidity in working working lives -- telecommuting, flexible work --, startups, low interest rates meaning units can be vacant and on balance sheet without too much pain for an owner) and build a smart offering around that: got an empty building OR bored of the overheads and headaches of managing an office space yourself? We'll lease it from you for a fixed price and then take any upside. You get smoothed cashflow and a fixed yield, and we get whatever upside we can make. They don't have any of the overheads, complexity, costs, or risks of owning the real estate. The IP and brand they're building (brand is an important factor here!) are not wedded to geography. Shoreditch isn't cool for startups any more? WeWork is gone.
- sonofaplum 8y ago
  But they also don't have franchise fees, or a captive market of franchisees to sell goods and training too. WeWork ARE the franchisees in this comparison.
- sonnyblarney 8y ago
  Owning the real estate is exactly why McDonald's is valuable :) but there are odd terms. But it doesn't answer the existential question as to their valuation. I don't see how WW has any systematic advantages at all. Nobody really cares if offices are in WW or some copycat clone. Many companies are wearing of paying heavy premiums for such offices and want out as soon as they can. Real estate is an old business. There is no 'new' here. Dressing up places, making them cool and selling at a premium is not new. I just don't see where the magic sauce in this business is.
gakos 8y ago
I personally don't understand the valuation, but there certainly seems to be demand for both their bonds and equity. Here's another Bloomberg article with info on their recent $700mm bond sale in April and a couple of interesting excerpts: > The company had initially planned to sell $500 million, and then received orders of about five times that amount. > Moody’s Investors Service rated the notes Caa1, seven steps into junk. S&P Global Ratings rated them three steps higher than Moody’s at B+, while Fitch gave them a rating of BB-, four steps higher than Moody’s. https://www.bloomberg.com/news/articles/2018-04-25/wework-boosts-junk-bond-offering-to-702-million-in-debut-sale https://www.bloomberg.com/news/articles/2018-04-25/wework-bo...
- jonknee 8y ago
  It's because they were dangling nearly 8% yields out there. As a comparison Argentina was recently successful with a 100 year bond (!) at about the same rate. This is the same Argentina that has defaulted on its bonds eight times and as recently as 2014. tl;dr disregard their ability to sell junk bonds
  - gakos 8y ago
    Not giving them props on their bond sale at all - I mean more that they had a huge level of interest in the sale so the market is showing a high level of interest DESPITE the junk rating. Bonds are junk when the reliability of repayment is low. I guess those investors (and anyone interested in the raise at $35b valuation) are ok with the risk.
    - jonknee 8y ago
      The huge level of interest was because the huge yield, you'd have to work hard to issue debt at a higher rate. The fact they needed to offer such a yield is proof that a lot of people think they are going to fail. (Remember that the bond holders will typically be repaid before the VCs.)
    - whatok 8y ago
      Anything with a decent yield is oversubscribed in the new issue market right now. That said, these bonds were trading at 92.75 at the lows just days after being issued. New issue bonds don't trade down that low unless there's something seriously wrong with the name or if the entire market is puking.
wintom 8y ago
I know your not trying to troll, statements of disbelief are very common about companies that are about to own an entire market with no real competition in sight. No one sees it yet but these guys are about to own office space and how that is acquired in the future, whose going to stop them? They are creating a future you don’t yet see. People couldn’t believe Uber was worth more than Delta airlines in one of their valuation rounds.. this is very common. They were about to own the taxi industry and take a cut out of every ride. This is so much bigger than that.
- jakelazaroff 8y ago
  This is an interesting comparison, because Uber is also hemorhaging money and to a lot of people it's still not clear they're worth anywhere near as much as their valuation. It's easy (relatively speaking) to build a big business when you can take on billions of dollars in losses. Turning that around is the hard part.
  - adventured 8y ago
    Plausible $15+ billion in sales over the next four quarters, growing at 70%, with the burn rate rapidly declining, and six years of accessible capital to operate with assuming zero further decline in their burn rate. Uber will be near or at break-even within 18-24 months. Their sales will be over $20 billion at that point. Are they worth three time sales? Definitely. How about 5x or more the $20 billion in sales two years out? Probably. Twitter is fetching 13x sales currently, and has only finally started making money after more than a decade of vast losses (even worse, Twitter has almost no growth). So how does a Twitter-like 10x sales multiple on $20 billion sound, two years out? $200 billion valuation. Does that sound crazy? I think it's very rich, the capital markets may think it makes sense. Netflix has a zillion PE ratio (and has for a long time), and a 16x sales multiple. Their margins are horrendous and will never be very good. There's a small chance they can ever grow into their current valuation (it'd require 500+ million global customers), much less anything higher. Uber's quarterly sales will catch Netflix in probably four or five quarters. How about a 16x multiple on Uber's sales four years out, with a conservative $25 billion in sales at that point. How does $400 billion sound?
microwavecamera 8y ago
This. As an olderish tech person that was around during the dot com bubble and crash in the early '00's, I don't think this is going to end well.
paxys 8y ago
It is "justified" because as long as you are a tech company with good name recognition Softbank is going to throw as much money at you as you ask.
- wodenokoto 8y ago
  Is softbank the new Yahoo? I remember back in the days when every startups revenue model was "eventually sell to Yahoo"

swampthinker 8y ago

Net loss, holy cow. $1.8B burn on $900M in revenue.

acchow 8y ago
The general strategy must be undercut the market to buy market share, and then transform the market entirely. I don't understand the precise mechanisms in the case of WeWork (it's not as clear as, say, Uber + self driving cars). Can someone explain?
- enraged_camel 8y ago
  They bought Meetup recently so maybe they are planning some sort of synergy?
  - toasterlovin 8y ago
    I just received an email from them touting the ease with which I can rent space from them (free for some introductory period) for the meetup I run. The problem is that many (most, I'm guessing) meetups are funded by an individual. Unless their space is drastically less expensive than a lot of the alternatives I found when trying to find a space for my meetup, nobody is going to be able to afford to use their space.

georgespencer 8y ago

As someone else has pointed out, not owning the real estate is part of the reason for the high valuation. A good franchise business will force the franchisee to buy the real estate and give the franchise the opportunity to buy the real estate at a fixed cost (either fixed outright or a multiple of revenue for the location), effectively giving them no downside on capital depreciation on the site (i.e. the value of the site going down) or the ongoing dilaps costs. They only have upside: they can buy the site if it's doing really well. And meanwhile, you're buying your training, goods, services, and paying a portion of your revenues to the franchise. WeWork is like a franchise which has no interest in owning your real estate. They and others have realised the opportunity to take advantage of a couple of factors in the macro (more fluidity in working working lives -- telecommuting, flexible work --, startups, low interest rates meaning units can be vacant and on balance sheet without too much pain for an owner) and build a smart offering around that: got an empty building OR bored of the overheads and headaches of managing an office space yourself? We'll lease it from you for a fixed price and then take any upside. You get smoothed cashflow and a fixed yield, and we get whatever upside we can make. They don't have any of the overheads, complexity, costs, or risks of owning the real estate. The IP and brand they're building (brand is an important factor here!) are not wedded to geography. Shoreditch isn't cool for startups any more? WeWork is gone.

sonofaplum 8y ago
But they also don't have franchise fees, or a captive market of franchisees to sell goods and training too. WeWork ARE the franchisees in this comparison.
sonnyblarney 8y ago
Owning the real estate is exactly why McDonald's is valuable :) but there are odd terms. But it doesn't answer the existential question as to their valuation. I don't see how WW has any systematic advantages at all. Nobody really cares if offices are in WW or some copycat clone. Many companies are wearing of paying heavy premiums for such offices and want out as soon as they can. Real estate is an old business. There is no 'new' here. Dressing up places, making them cool and selling at a premium is not new. I just don't see where the magic sauce in this business is.

gakos 8y ago

I personally don't understand the valuation, but there certainly seems to be demand for both their bonds and equity. Here's another Bloomberg article with info on their recent $700mm bond sale in April and a couple of interesting excerpts: > The company had initially planned to sell $500 million, and then received orders of about five times that amount. > Moody’s Investors Service rated the notes Caa1, seven steps into junk. S&P Global Ratings rated them three steps higher than Moody’s at B+, while Fitch gave them a rating of BB-, four steps higher than Moody’s. https://www.bloomberg.com/news/articles/2018-04-25/wework-boosts-junk-bond-offering-to-702-million-in-debut-sale https://www.bloomberg.com/news/articles/2018-04-25/wework-bo...

jonknee 8y ago
It's because they were dangling nearly 8% yields out there. As a comparison Argentina was recently successful with a 100 year bond (!) at about the same rate. This is the same Argentina that has defaulted on its bonds eight times and as recently as 2014. tl;dr disregard their ability to sell junk bonds
- gakos 8y ago
  Not giving them props on their bond sale at all - I mean more that they had a huge level of interest in the sale so the market is showing a high level of interest DESPITE the junk rating. Bonds are junk when the reliability of repayment is low. I guess those investors (and anyone interested in the raise at $35b valuation) are ok with the risk.
  - jonknee 8y ago
    The huge level of interest was because the huge yield, you'd have to work hard to issue debt at a higher rate. The fact they needed to offer such a yield is proof that a lot of people think they are going to fail. (Remember that the bond holders will typically be repaid before the VCs.)
  - whatok 8y ago
    Anything with a decent yield is oversubscribed in the new issue market right now. That said, these bonds were trading at 92.75 at the lows just days after being issued. New issue bonds don't trade down that low unless there's something seriously wrong with the name or if the entire market is puking.

wintom 8y ago

I know your not trying to troll, statements of disbelief are very common about companies that are about to own an entire market with no real competition in sight. No one sees it yet but these guys are about to own office space and how that is acquired in the future, whose going to stop them? They are creating a future you don’t yet see. People couldn’t believe Uber was worth more than Delta airlines in one of their valuation rounds.. this is very common. They were about to own the taxi industry and take a cut out of every ride. This is so much bigger than that.

jakelazaroff 8y ago
This is an interesting comparison, because Uber is also hemorhaging money and to a lot of people it's still not clear they're worth anywhere near as much as their valuation. It's easy (relatively speaking) to build a big business when you can take on billions of dollars in losses. Turning that around is the hard part.
- adventured 8y ago
  Plausible $15+ billion in sales over the next four quarters, growing at 70%, with the burn rate rapidly declining, and six years of accessible capital to operate with assuming zero further decline in their burn rate. Uber will be near or at break-even within 18-24 months. Their sales will be over $20 billion at that point. Are they worth three time sales? Definitely. How about 5x or more the $20 billion in sales two years out? Probably. Twitter is fetching 13x sales currently, and has only finally started making money after more than a decade of vast losses (even worse, Twitter has almost no growth). So how does a Twitter-like 10x sales multiple on $20 billion sound, two years out? $200 billion valuation. Does that sound crazy? I think it's very rich, the capital markets may think it makes sense. Netflix has a zillion PE ratio (and has for a long time), and a 16x sales multiple. Their margins are horrendous and will never be very good. There's a small chance they can ever grow into their current valuation (it'd require 500+ million global customers), much less anything higher. Uber's quarterly sales will catch Netflix in probably four or five quarters. How about a 16x multiple on Uber's sales four years out, with a conservative $25 billion in sales at that point. How does $400 billion sound?

microwavecamera 8y ago

This. As an olderish tech person that was around during the dot com bubble and crash in the early '00's, I don't think this is going to end well.

paxys 8y ago

It is "justified" because as long as you are a tech company with good name recognition Softbank is going to throw as much money at you as you ask.

wodenokoto 8y ago
Is softbank the new Yahoo? I remember back in the days when every startups revenue model was "eventually sell to Yahoo"