Just crazy to me that this company was worth $47bn in the private round.
Some of the recent IPOs are trading at 20x+ Sales multiples, and It makes me think if this is a sign of the end or is this just a blip on the radar and we will start seeing 50x multiples.
What are your thoughts?
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Well despite what their S-1 may have you believe they're not in any way shape or form tech, so no probably not. Valuations will probably never reach the same level as that the height of the 2000s did because that was the dawn of the modern internet, resulting in hype was beyond anything we're experiencing now. The current valuations while still stupid make more sense in comparison given that the companies they're applied to are super high growth with billions in revenues, typically with some critical point at which they can achieve scale to lower their costs and become profitable (WeWork does not have this). Back then they were slapping a 50x+ sales multiple on something with just $10M in revenue, often times much less.
Valuations are out of control in tech. Cash flow is cash flow and personally I'll always buy it where it's inexpensive. Have ended up in a few "ugly" industries that aren't sexy because of it but IDGAF because I'm not a 17 year old fuck boy.
I don't know of any LONG TERM hyper successful investors in tech...
Maybe I'm too much of a Howard Marks & BuffetBoi fanboy? :)
Interestingly, valuations are coming down in most other areas outside of tech. Every discussion now in banking involves the end of the cycle and as a result, debt investors are getting slightly more control over terms and leverage.
My hot take is that "tech" is not really a sector now that technology is involved in every other industry. Digitally native consumer brands that sell direct are not "tech" they are just a much better channel than brick and mortal retail, etc. Everyone's just playing the game to say they are "tech" to up their multiple. Rather than that let's just focus on growth, margins, and stability.
MSCI and S&P seem inclined to agree with you. Look at how they reorganized Telecoms into Comm. Svcs last year. Google is NOT IT. Facebook is NOT IT. For us it was just a reporting change, but sector funds got slammed with all sorts of fun problems.
The We Company is an abomination. But what's even more of an abomination are the investors who are granting insane, stupid, intellectually indefensible valuations to a company that is hemorrhaging cash with almost no hope of ever turning a profit. It's one of the most ludicrous business stories in recent memory.
The only more absurd valuation I can think of is the $10 billion valuation of Beyond Meat, which has more than double the value of Wendy's despite operating in an industry (food/grocer) that has insanely low profit margins. And oh btw, their 2018 revenue was $56 million...
I know way too many millennials who do not work in finance who "sagely" invested in Beyond Meat thinking they caught the next Amazon. The late cycle behavior is the strongest its been since the last recession.
[Prop/insure/RE/med/legal/donut/kombucha/ANYTHIN]-Tech is a meme. Digital revolution is a meme. Industry 4.0 is a meme. Robotics is a meme. 3D printing is a meme. Blockchain is a meme, sorry
By the way, news flash: the world still runs on "archaic" industries such as energy (Costa Rica is running 100% on renewables ACCORDING TO some flaky-ass article reposted 20 times on LinkedIn, but I'll bite), logistics, finance/accounting/HR (but ROBOTICS is going to kill them all next year ACCORDING TO some Joe Schmoe's opinion flick on Bloomberg Opinions). I can go on, but I need to drink some chai and meditate on top of Empire St with my next-gen pals who also "get it" and eat vegan-only grossly overpriced brunches like I do.
Hipsters seem to have trouble understanding that every single keyboard they type on is made of plastic, a refined product from crude/natural gas, and every single smart phone they type on is made from mined minerals. Their special coffee drink was grown out of the earth and harvested by hand and is probably housed in a plastic cup. Their hipster jacket was made of cotton or wool grown by a massive agricultural operation and their hipster boots were made from the dead flesh of a cow. All of these things were provided for by the sweat of labor so much of which they despise such as oilfield workers.
In what world is WeWork a tech company?
if they were valued the same as comparable businesses, Neumann wouldn't have been able to buy a wave pool and private jet. c'mon man, can't be a CEO and have your kids grow up in a duplex flying coach, gotta be separate from the proletariat.
From a real estate perspective, it is a bad business model. In a nutshell, it's a company that leases large amounts of space and then tries to lease it out to multiple individuals for a higher rent. There is nothing proprietary about it. The higher rent spaces ( private offices) usually go first , but they have trouble getting people to lease the "public shared spaces", where it is super loud and distracting. Offering free music and lemon water isn't enough to justify the high price. Plus, the board is trying to oust the CEO as we speak. I would steer very clear of this dumpster fire...it will sink soon enough.
Do VC investors ever ask, "What would it take for the business model to become profitable, and what would that look like margins-wise?" Or do they just fellate each other in between kombucha-fueled yoga sessions while humming about how the new intern class all rowed at Harvard and Stanford?
Because if you dig into the numbers on WeWork and run a few scenarios, you'l see this ending badly.
And for the cast of characters:
Masa Son is a loony toon. Good luck explaining this one to MBS after telling him you'll make him $1tn.
Neumann is your typical snake-oil salesman, just listen to the man rant about nonsensical futurism. Also, he openly said he played the private markets perfectly. And he cashed out hundreds of millions pre-IPO. Played VCs like a fiddle, and they deserve it.
I do think this is a point of reckoning for VCs. Late-stage VCs will realize they can no longer treat investing like a roulette wheel, and that will trickle down to everyone except for the Benchmarks and Sequioas because they control so many seed relationships. Whatever happened to cash flow?
You can clearly see a trend with these companies: Overvalued VC rounds and preIPO valuations -> go public -> stock flies high -> become profitable -> stock drops further because it's now valued on earnings which are shit. Remove the IPO portion for companies that stay private and it's the same formula.
Welcome to the shitshow
allow me to politely interject, "tech" is WAY too broad of a classification. if you're lumping WDAY, WeWork, BYND, UBER, etc., in with MSFT, GOOGL, MA, V, CSCO, AAPL, you're missing the boat.
remember, google and amazon traded at ridiculous valuations post-IPO, but then they quickly grew their way out of it. you're seeing 3 different animals in tech right now
cash cow & innovating - MSFT, CSCO, etc. - these are companies that made their hay on hardware and dying industries but unlike IBM, got on the innovation train early and have successfully pivoted to a more diversified tech company with a balance sheet Warren Buffett would be envious of. they will decline but survive a recession, they are my biggest "buy" long term
cash cow & uncertain/stagnant - ORCL, IBM, maybe AAPL (MAYBE!) - these are absolutely good, debatably great companies that will most likely not sink, but need to do something to avoid being a value trap. maybe they had a shitty merger, maybe they waited to long to innovate, whatever. about the downturn, they're not so ridiculously overvalued that they'll erode 90% of your basis, but just like the above, they will decline in a recession
the time bombs aka companies with no positive earnings/cash flow nor any foreseeable path to the same - unlike the above two groups which can self fund operations (and only tap debt when profits get stuck overseas and can borrow for 5y sub 2%). the list is plentiful but I don't wanna ruffle too many feathers. all I'll say is the following. when the well runs dry, you'd better be producing your own water. in other words, when funding gets tight, eventually your VCs, PE sponsors, and the public get tired of you not making any money (unless you do a daily regimen of ibogain like the people at softbank do every time neumann enters the building), and eventually you have to cut divisions, slow innovation, or cut cost some other way. in the end, if you do not eventually turn a profit or show progress to that point, investors will stop giving you money and your business will crumble.
so no, there is not a tech bubble broadly speaking. there are unprofitable ventures in an industry that has low startup costs and high failure percentage, that is called healthy capitalism. I think the risk of that causing a broad market selloff is quite low, I think it will be any number of other things like war with Iran, liquidity drying up in the repo market, a Fed misstep, a rerating of multiples as people realize we may be at peak profit margins, etc., but snapchat ain't breaking this bull market, sweetie.
There is a huge tech bubble - but primarily in the private Vc backed companies. Exponentially more money has been thrown at garbage companies than any other time in human history and has had a huge ripple effect primarily in the Bay Area economy but secondarily in the retail industries and taxi industries for example. A huge amount of pension money will eventually be vaporized. Those public companies you mention legitimately make massive profits and actually can likely continue to do so even in a downturn as 90 percent of their staff is bullshit and not needed. However, once the vc Ponzi scheme blows up huge amounts of loss making companies will fail. There are also pockets of accounting fraud on overvalued companies that eventually will be found out, like Ali baba, Netflix, and amazon web services. Finally Tesla will also go bk.
What in the world is driving these VCs to the valuations they placed/are placing on some of these companies? There is no--none, zero--conceivable path to profitability for WeWork. None. I simply cannot understand the investors--people who are using real money that they can lose--to invest in this horseshit company. It genuinely enrages me. The principle that you can lose billions of dollars a year and fail to provide even a pretend rational path toward future profitability and still walk away stinkin' rich is enraging to the core. I have the same feeling toward Uber and Lyft, which, as far as business models, are beyond garbage companies (they will never be profitable and they have little chance of succeeding in the autonomous car market as the manufacturers will have all the leverage and no need for them).
Honestly, it may be envy that enrages me so much, which is bad. But it's offensive to the core that you can become rich off owning/operating a company that will never earn a single dollar in profit. It's just offensive to the principles of capitalism.
Nah
yes, a large dollar amount of pension money will go away, but as a percentage, I bet it's forgettably small, and I'm happy to be proven wrong.
and the only reason more money has been thrown at those companies versus history is because VC scene in the 90s wasn't what it is today so all of the money came from public companies. the question is not "are there pockets of overvaluation" because the answer is always yes, the question is "is there a bubble that could have tremendous negative impact to the broader financial markets?" my view is no.
a bubble is generally described as a sector where growth is expected to continue indefinitely into the future, companies get oversubscribed when they want to raise capital on a consistent basis, clever new accounting metrics are invented and people believe them (anyone still talking about community adjusted EBITDA?), and anyone who questions the space is called a luddite, nonbeliever, or has been (like warren buffett in 1998). this is not that. yes, there is excitement about tech, but it's nowhere near what it was in the 90s, there will be blood, but this is not going to tank the entire market, so from that perspective, it's really a non-issue in my opinion
what worries me is the rhetoric around how companies ought to be run differently, and increased regulation, misplaced tax policy (you want to tax wealth but leave loopholes open? WTF?!?!?!?!), and ballooning deficits leading to a possible crowding out effect. so no, PEs of companies I don't invest in do not worry me
Valuations are based on something we didn't have in the 90's. The idea of global dominance. Valuations are resetting, there is no denying that. However we are far from the end of a tech bubble, the reality is that the "costs" are attributed to human capital and M&A. There really isn't much else, this means that once automated systems reach the full potential we won't be seeing the insane burns we have now. Remember that all of todays big tech giants had similar trajectories in terms of cash flow. The exception is the sharring economy shit that doesn't really have a chance of ever being profitable. There are to much systemic costs to make it work.
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