Room To Grow: Why WeWork’s $20B Valuation Isn’t Crazy

With WeWork‘s latest funding mega-round bringing the unicorn to a whopping $20B valuation with $2.76B in total funding to-date, investors have long been speculating whether the company merits such a high valuation. We’ve examined previous unicorn valuations including Dropbox, Airbnb, and Blue Apron and compared WeWork’s current and projected valuation data, using CB Insights’ Enhanced Valuation capability, against those posted by a few of its public-market counterparts. Specifically, we looked at Boston Properties, Vornado, and IWG plc (dba Regus).

VALUATION TIMELINE

Throughout its funding history, WeWork has only seen uprounds with multiple leaps in its valuation. WeWork first gained its unicorn status in Q1’14 with a $1.59B valuation after raising a $157M Series C round from notable investors including Benchmark Capital and J.P. Morgan Chase & Co. WeWork’s valuation has continued to rise with their most recent valuation of $20B (as noted by the dashed line in the chart below), after a Series G – II round from Japan-based SoftBank Group and undisclosed investors in Q3’17. These funding rounds position the company to expand into Asia, specifically Japan and most recently China. WeWork also just opened their first India office and announced ambitious expansion plans for Latin America.

This latest valuation also ties WeWork with Palantir as the 6th most valuable startup in the world, after SpaceX, Airbnb, Xiaomi, Didi Chuxing, and Uber.

This latest valuation ranks WeWork just above real estate incumbents Boston Properties, Vornado, and Regus (not pictured on the below graph). WeWork surpasses Vornado’s market cap of $17.8B (as of 07/17/17) by over 12%. Boston Properties, which trades at a valuation around $18B, trails second to WeWork.

Boston Properties reportedly has 43.7 million total square feet in-service and 164 total properties while CEO Adam Neumann has stated that WeWork has 180 buildings globally for WeWork and 2 buildings for WeLive. WeWork has not reported how much square footage the company controls, but it’s been estimated to be around 3 million in New York City alone.

PRICE/SALES MULTIPLE

We examined multiples of WeWork, Boston Properties, Vornado, and Regus. With a $20B valuation based on its latest Q3’17 round of financing and projected annual revenue of $1B for 2017, we calculated a 20x price-to-sales multiple. Its multiple would be well over twice the size of Boston Properties, which has a price-to-sales ratio of 7.37. WeWork’s multiple is nearly 18x the size of co-working incumbent Regus, WeWork’s most similar competitor.

Though WeWork’s multiple may seem inflated (for reference, Blue Apron’s was 2.51 at the time of its IPO), its revenue growth dramatically exceeds that of its public competitors. With an estimated revenue of $532M for 2016 and $1B projected revenue for 2017, we calculated 88% year-over-year growth.

In comparison, WeWork’s public counterparts have seen little revenue growth. Vornado has seen less than 1% revenue growth while both Boston Properties’ and Regus’ revenue are decreasing. Obviously, though, WeWork’s revenue is a fraction of public real estate companies’ revenue, with competitors bringing in $2.5B or more. Additionally, WeWork’s revenue growth is dependent on whether the company hits its projected $1B revenue target for 2017.

WEWORK VALUATION CRITIQUE

Below, for context, we outline some of the more common reasons investors argue that WeWork is over-valued:

• Real estate, not tech: WeWork is funded as if it were a tech company, but many real estate incumbents and investors believe that WeWork is simply occupying a niche within the real estate market of “space-as-a-service.” Though many have doubted the merit of its frequent mega-rounds, WeWork has been growing like a tech company and similarly to other highly valued tech companies, WeWork has attracted funding based on its promise of future growth over their current earnings. WeWork’s CEO Adam Neumann has historically refrained from placing the company within tech or real estate and has instead referred to WeWork as a “community company,” a categorization which the company is now reconsidering.
• Heavy market dependencies: WeWork’s success is dependent on the health of both the tech and real estate industries. While the company’s flexible contracts may be ideal for small companies, WeWork would inevitably face trouble leasing their spaces if startups began to dry up or if the real estate market experiences a downturn similar to the 2008 financial crisis. However, the historical precedent set by public competitor Regus’ strong performance in 2009 suggests that co-working spaces actually perform well during economic downturns, as firms tend to be wary of making large overhead commitments and thus prefer short-term leases. Additionally, WeWork has expanded its client base from small startups to large corporates like IBM, thus mitigating potential risks of being unable to sustain rental agreements.
• Lack of tangible assets: WeWork does not currently own any property; the company takes long-term leases and rents those properties out at a higher value than their lease payments by adding rental and office management fees (cleaning, internet, events, etc.) begging the question how a company with such a high valuation doesn’t own any tangible assets. However, the company recently raised several hundred million for a real estate investment fund, and has announced its intention to buy buildings where they are leasing space.
• Ultimately not disruptive: Many WeWork skeptics believe that the company is not truly creating a new business model and may end up following the normal ups and downs of the economy. Regus, for example, has been in the co-working space for years and shares a very similar business model with WeWork. However, the company has been pursuing massive revenue opportunities beyond the traditional co-working model. If WeWork can demonstrate substantial revenue from new areas such as WeLive and facilities management and even fitness, which are presumably estimated in their 2017 $1B revenue run-rate, they would be disrupting the traditional co-working model and differentiating themselves from incumbents such as Regus or other private co-working companies such as Chinese co-working unicorn UrWork.

Defenders of WeWork’s rich valuation note that the company is bringing in revenue by providing core services and community benefits, growing their enterprise sales (which account for 30% of new business), expanding globally, and diversifying their revenue streams as previously mentioned. Though not time-bound, Neumann has indicated that WeWork has eventual plans to IPO, as echoed by the company’s recent restructuring. WeWork’s 2017 performance and revenue growth will likely dictate the timing of their decision to go public.

Regardless of whether its valuation is fair, it’s clear that WeWork has captured deep investor and public interest. As the Trends chart below shows, “WeWork” exceeds that of its public competitors in news mentions. The company’s news mentions spiked to an all-time high of 48 in June 2017.

If WeWork can manage to hit its $1B projected revenue target for 2017, continue increasing enterprise sales, and successfully diversify its revenue streams locally and abroad, the company definitely has a shot to justify its $20B valuation.