Why WeWork’s $47 billion private valuation could be a key stumbling block for its IPO — and might even derail it completely

It hasn’t been a great year for unicorns. It could be an even worse one for WeWork.

Unicorns is the term used for startups with private valuations north of $1 billion. Some of the most highly valued among them, Lyft, Uber, and Slack, have all gone public in recent months, only to see their stocks fall soon thereafter and largely stay below their initial prices.

The next jumbo-size unicorn in line to go public is WeWork. And its post-IPO stock performance could be even worse than its predecessors — assuming it’s even able to go public at all, Scott Galloway, a professor of marketing at New York University and former startup founder, said.

“This might be the first unicorn that doesn’t get out,” Galloway said.

In other words, demand for WeWork’s shares might be so tepid among the institutional investors who actually take the first stakes in companies during an IPO that the company — or its bankers — might decide not to go public after all. Assuming demand is that weak, that may be its only option other than to accept a massively discounted market capitalization in the public markets relative to its $47 billion private valuation.

WeWork’s business and stock offering have lots of problems, said Galloway, who last week wrote a scathing critique of the company’s proposed offering entitled “WeWTF.” The coworking giant has $47 billion in long-term lease obligations but will take in only around $3 billion in revenue this year. It’s burning cash and seeing its losses grow larger, even as its revenue increases. It’s trying to masquerade as a high-profitability tech business, when it’s really just a real-estate firm, with much higher expenses. And its corporate governance and certain transactions by CEO Adam Neumann raise multiple red flags, he said.

Read more: NYU professor calls WeWork ‘WeWTF,’ says any Wall Street analyst who believes it’s worth over $10 billion is ‘lying, stupid, or both’

But among the biggest problems facing WeWork’s offering is its valuation, Galloway said. The company was valued at $47 billion as of the close of its last funding round in January. Given its business model, its huge obligations, and all the other challenges and red flags it faces, the company isn’t rationally worth anywhere close to that, Galloway said.

WeWork’s jumbo-size private valuation is a huge problem

Analysts might be able to make the case that WeWork might eventually be worth $10 billion, but right now, Galloway said, “it is very difficult to find, in my view, any argument that this thing is worth more than $5 billion.”

That means that if WeWork ends up going public at anywhere close to its last private valuation, it could be in for a steep fall, he said. While Uber and Lyft have dropped from their IPO prices, and Snap lost a massive amount of value after it went public, their value destruction could pale in comparison to WeWork’s. Assuming that WeWork went out with a valuation of around $47 billion, it could lose $40 billion in value, Galloway said.

“You’re going to see a destruction in value here on a gross level that could be unprecedented in the marketplace … in recent memory,” he said. “You haven’t seen that sort of value destruction,” he added, “since … the dot-com destruction” of the early 2000s.

To be sure, WeWork has not yet specified the valuation it will seek when it sells shares in its IPO. It’s possible that WeWork could list at a lower valuation than the $47 billion it commanded in its last private-market funding, though that would be a fairly unusual move that most companies try to avoid.

If WeWork does try to IPO at a $47 billion valuation, Galloway isn’t the only one who thinks it will have a tough time convincing investors it’s worth that much.

That valuation is nearly 26 times greater than its sales for last year. That’s much greater than the price-to-sales values of Lyft or Uber when they went public, said Daniel Morgan, a longtime tech investor and a senior portfolio manager at Synovus Trust. And the poor post-IPO performances of those once high-flying unicorns have almost certainly left a bad taste in the mouths of investors, Morgan said.

“They’re definitely stretching the bar on valuation,” Morgan said of WeWork. “They’re probably going be met with some skepticism here in the next couple weeks,” he added, “when they start pitching their wares” to potential investors.

Got a tip about WeWork or another company? Contact this reporter via email at twolverton@businessinsider.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop.


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