Last year, I called the co-working space provider, WeWork: The Uber of Dumb Investments. US$10bn struck me as a completely unsustainable value for the unlisted company. I stand by my claim, but the company recently raised US$430m from Chinese investors at a price that implied the company’s valuation is now more like US$15bn!
The Financial Times, while maintaining a veil of impartiality, highlighted the absurdity of that valuation by comparing it to one of Manhattan’s landmark buildings. The GM Building’s current valuation is about US$2,400 per square foot, for outright ownership. WeWork, which owns no property, is valued at US$3,000 for every square foot that it leases.
But I think there’s an even starker comparison available. UK competitor Regus plc has an enterprise value of a little under £3.0bn, or US$4.2bn. It has 2.3m members worldwide. That’s an enterprise value per customer of US$1,825. That strikes me as about right given typical customer rents and retention.
It’s far from a perfect comparison, WeWork’s management would probably be insulted that we called Regus a competitor. But WeWork’s US$15bn valuation and 50,000 customers give it an enterprise value of US$300,000 per customer. The comparison isn’t perfect, but is relevant.
There is a slim chance that WeWork might grow (and grow and grow and grow) into its valuation. But I’ll point out a few important factors:
- Regus is also growing pretty damn fast at the moment
- New competition could and should emerge (you could replicate WeWork’s existing position today for but a small fraction of US$15bn)
- Network effects are nowhere near as strong for WeWork as for, say, Uber
- Growth ain’t free.
The smartest thing WeWork’s management could do today is raise as much money as it can while the going is good. US$430m is a start, but if I were running the show I’d be getting much greedier. Perhaps it could buy Regus. It would also be wise to stay unlisted while it tries to raise capital, away from the reach of short sellers, non-believers and other rationalists. Raising big licks of capital won’t justify the current valuation, but it will add real intrinsic value for existing shareholders (it won’t stop recent investors from losing money, unless they can repeat the trick at higher and higher prices).
The probability that WeWork’s new Chinese investors won’t eventually regret their recent commitment? I’d put that at significantly less than 5%. This is one of the craziest valuations I’ve ever come across, and that’s saying something.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.