How Sick Is The “WeWork” Unicorn?

Space-sharing firm WeWork was supposed to be the next Wall Street unicorn. A unicorn firm is a nickname given to start-up companies that become a quick success – stemming from the definition that a unicorn is “something highly desirable but difficult to find or obtain.”

Instead, some analysts are calling WeWork the poster child of what is failing in today’s initial public offering (IPO) market with reports that underwriters JP Morgan and Goldman Sachs have urged the firm to postpone its IPO in the face of a plummeting valuation. WeWork’s management continues to push ahead with the deal and expect it to launch the week of September 23rd. Analysts say the valuation could be as low as $10 billion, however, which is quite a climb down from the $47 billion value that was widely circulated earlier this year. Press reports say underwriters previously suggested WeWork’s value could rise to $65 billion after the IPO, a prospect that now seems unlikely.

WeWork Needs Capital

The problem is that WeWork is between a rock and a hard place when it comes to this IPO because the firm needs to raise at least $3 billion to tap into an additional $6-billion credit line that has been put in place by its banks. No IPO funding means no access to that credit line at a time when the firm needs additional capital to keep growing. For example, according to its S-1 filing with the US Securities and Exchange Commission, they spent $2 billion in 2018 just on purchases of property and equipment in a year when operating cash flow was negative $177 million.

Epic Value Destruction

How is it possible that a firm can lose $37 billion of value before it even gets out of the gate? Many analysts blame the IPOs of ride-hailing apps Uber Technologies Inc. (NYSE: UBER) and Lyft Inc. (NASDAQ: LYFT), which have not performed well since going public earlier this year. For example, Lyft went public in late-March 2019, and the stock is down approximately 35% since then. Uber followed in May in what some suggested was a fear-of-missing-out (FOMA) move. Uber debuted at $45 per share and is down more than 24% since coming to market.

Investors are more discerning following these IPOs and are increasingly requiring companies to be profitable and have proven business models before pushing up valuations. Not all unicorns are having a hard time in 2019. For example, the plant-based meat substitute company Beyond Meat Inc. (NASDAQ: BYND) is up more than 520% since its IPO in May 2019. Investors are rewarding the company for a business model that seems to be working in terms of profitability and growth.

How Should Investors Play This Space?

With such widely varying stories of success and failure, it is hard for a potential investor to know which new IPO will be a unicorn and which will be a donkey. One way to invest in start-ups is to use a diversified ETF of companies that have recently undergone an IPO. One such ETF is the Renaissance IPO ETF (AMEX: IPO) which is “designed to provide investors with efficient exposure to a portfolio of U.S.- listed newly public companies ahead of their inclusion in core equity portfolios”, according to Finscreener.com. The IPO ETF is up 30.7% in 2019 compared to around 20% for the S&P 500 index.

---

Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.