tag:blogger.com,1999:blog-8152901575140311047.post2812484003306543710..comments2024-03-28T12:49:46.624-04:00Comments on Musings on Markets: Runaway Story or Meltdown in Motion? The Unraveling of the WeWork IPOAswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-8152901575140311047.post-69294583326154336292019-09-26T14:56:16.491-04:002019-09-26T14:56:16.491-04:00This is a great post. I was frankly a little surpr...This is a great post. I was frankly a little surprised at the ~8% WACC. A couple thoughts:<br />*The spreadsheet calculated the value of the lease liabilities to be $22bn but the company has on their balance sheet $18.5bn, so the equity component of the cap structure would be a big bigger if you used the company's numbers<br />*The cost of debt of 5.2% seems light - their bonds are rated B+ and have a yield to worst of 9.9%. A 10 year bond on B rated companies is roughly 7.8%. Based on operating lease worksheet, it would take ~7.5% for the value of leases to be equal to the company's balance sheet numbers<br />*Assuming we use 7.5% cost of debt, the WACC would be 9%, which actually derives a higher share price because cash flows are negative in through year 8, somewhat counterintuitive but I suppose makes senseAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-23130364352608673542019-09-14T17:09:00.200-04:002019-09-14T17:09:00.200-04:00Professor - thanks for posting your thoughts on th...Professor - thanks for posting your thoughts on the valuation. One of the weaker links is the terminal revenue growth. Do you feel that is not very likely for the company to grow 60% CAGR in the next 10 years, then dip to a 1.6% CAGR? I would imagine you would need to assume a much higher terminal growth rate if you truly believe the 60% growth number. If you insist that the terminal growth rate must be lower / at the risk free rate, then would it make sense to make the DCF much longer? Perhaps 20-25 years? I think that would be a much better assumption to make here vs the low PGR at year 10.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-69048121189161638642019-09-14T03:58:58.326-04:002019-09-14T03:58:58.326-04:00Great post Professor.
Just one thought, in the ...Great post Professor. <br /><br />Just one thought, in the post you have mentioned that the lease payments translate into a debt value of ~ $22 b, and there is a concern that there is a mismatch due to long leases commitments and short term revenues. However, most of these leases would have minimum lock-in commitments only - ie one way leases. For example in India though Wework signs 20 year lease with the landowners, the lock-in from Weworks side is only 5 years. Hence, to that extent Wework is insulated against any downturn. So should we still discount the entire lease rentals, and ignore the value of lock-ins and isn't the mistmach /risk mitigated to that extent? Muhussanoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-5187061107202155632019-09-13T09:35:06.603-04:002019-09-13T09:35:06.603-04:00Professor, I really enjoyed your piece on WeWork. ...Professor, I really enjoyed your piece on WeWork. The simple story for me comes down to real-world experience. How many companies do we know that value their businesses on obscene forecasts all dependent on flawless execution? Ultimately this comes down to one simple idea, rental agreement arbitrage. My view is this could work wonderfully when managed slowly and carefully. Exploding into unknown markets is a failing strategy. Anyway, good luck to them. I hope it works out. (PS. See you for the TRIUM class in US) Anonymoushttps://www.blogger.com/profile/18185711966299864718noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-6781345993002246332019-09-11T15:53:17.586-04:002019-09-11T15:53:17.586-04:00Isn't slashing your valuaton so significantly ...Isn't slashing your valuaton so significantly so fast is akin saying to investors - we tried to screw you, sorry, no hard feelings, lets play a new game?<br />In order to half the valuation,they had to cut the main scenario.<br />Given the intrinsic information assymetry and that the trust in the company is required for an investment, who would want to invest in a such game so soon?<br />It seems that the canceling/indefinitely postponing the IPO is imminent.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-36184525619759218832019-09-11T15:02:13.797-04:002019-09-11T15:02:13.797-04:00Higher revenue and profit margin results in a nega...Higher revenue and profit margin results in a negative value? just entry error I guess.<br /><br />Thanks for all your contribution professor. <br />Imzenhttps://www.blogger.com/profile/12927140253101251493noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-78410748304307256082019-09-11T03:32:51.102-04:002019-09-11T03:32:51.102-04:00VCs typically have protections in a down round, so...VCs typically have protections in a down round, so paradoxically, Softbank and other later stage investors may actually benefit (from an ownership % standpoint) if We were to price in the $15-20B range. Softbank could end up with significantly more than 30% of the business; moreover, if they have real conviction in the long-term secular tailwinds that We bulls often espouse (i.e. preferences shifting to shared co-working, smaller companies being able to operate with highly variablized cost structures for long periods of times a la AWS/cloud, etc), they should hope for this outcome.Benjaminhttps://www.blogger.com/profile/03651307672838207020noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-51238238902456688652019-09-11T01:24:03.603-04:002019-09-11T01:24:03.603-04:00They say the majority of their leases are held by ...They say the majority of their leases are held by individual special purpose entities, and their corporate guarantees total $4.5 billion.<br /><br />What impact does this have on your view of valuation? On a related note, if they moved the leases from special purpose entities to being fully liable to the head company, would that create or destroy value?Michaelnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-71971907464481066262019-09-10T20:57:30.612-04:002019-09-10T20:57:30.612-04:00I think your valuation is amazingly "spot on&...I think your valuation is amazingly "spot on";<br />The thing about WeWork is, they want to emulate the "network effects" of a tech "platform". So they anticipate tying-in their customers with discounted services from <i>other</i> weWork customers. So, imagine for the future: a single Programmer grinding out his time at WeWork, using a WeWork barber at a discount, then getting a massage from a WeWOrk masseuse, having lunch at a WeWork cafeteria at a discount, then doing his taxes at a WeWork accountant.....so on and so forth. That's their wet dream. For that they need scale!kiersnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-60277617687579011252019-09-10T15:14:47.634-04:002019-09-10T15:14:47.634-04:00I came to read this article from a post on Bloombe...I came to read this article from a post on Bloomberg. Super thoughtful analysis, and I'm certainly not a WeWork optimist for all the strategic reasons you discuss, but I'm a bit confused. Isn't the "debt" of the long-term leases accounted for in the 25% contribution margin that WeWork cites? That is, that 25% margin is already burdened by the financing cost of the long-term "lease" debt, and so the cash flow margin you derive (the 12.50%) is effectively the cash to equity holders (plus third party, non-lease debt holders of course), not cash to the total firm (with the landlords of the long-term leases a claimant against that total firm value). So the capitalized value of that cash flow stream shouldn't be doubly-burdened by the capitalized value of the lease debt, right? <br /><br />I apologize if I'm using language not in keeping in your standard, I guess I'm just confused why this isn't double-counting the effective leverage on the business (which I agree is substantial and totally unaddressed in the prospectus). Thanks!Stevehttps://www.blogger.com/profile/17605565585125502389noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-62064854792076532342019-09-10T12:14:06.862-04:002019-09-10T12:14:06.862-04:00Professor, I am your e- student of 2010-12 and you...Professor, I am your e- student of 2010-12 and your lectures were value enhancing to my career. My career grew in different direction than finance though.Was going through your insightful newsletter today and found your passion for education is intact. You have helped many students life long. Thank you. mrugenhttps://www.blogger.com/profile/02570022992808400667noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-70875322789116253862019-09-10T08:37:42.042-04:002019-09-10T08:37:42.042-04:00Great post as always professor,
Just two interest...Great post as always professor,<br /><br />Just two interesting thoughts/discussion points that don't get enough attention in the WeWork story:<br />- Nobody talks about it, but almost all of these "unicorns" have the exact same VC backers every round. This leads to an incestuous and conflict ridden process of ever higher valuations. The VC's love to claim that the valuations are driven by "market pricing" each round but if they're already invested and have reasons for seeing higher valuations, we get situations like WeWork.<br />- Which leads to the second point, what valuation are the VC's and big funds that hold WeWork going to use after this (assuming the IPO is shelved). Do they continue to maintain that WeWork's valuation is around $50 billion until the next funding round? Or do they cut it to something around $20 billion (which still isn't enough to clear the public markets)? There's a lot of money in management fees and performance fees on the line. Anonymousnoreply@blogger.com