WeWork, which was expected to go public this month, has suspended its IPO at least until next month after a lackluster response from potential investors. Valued at $47 billion in private transactions in January, WeWork perhaps couldn’t convince investors that it’s worth that price (or even half of that).
JPMorgan Chase (JPM) and Goldman Sachs (GS) are leading the WeWork IPO. One of JPMorgan Chase’s funds has invested in WeWork. The bank will likely be the lead underwriter for the IPO, and is leading WeWork’s debt financing.
At the start of the year, WeWork was the second-highest valued “unicorn” company after Uber (UBER). However, its valuation could fall before the company goes public, bringing down its ranking among unicorns.
WeWork IPO delay puts debt funding in doubt
WeWork’s IPO shelving also poses a problem because the company was looking to raise debt to fund its growth. However, the disbursal of the debt is contingent upon the WeWork IPO fetching at least $3 billion. In short, postponing the IPO postpones that debt funding. That delay could hurt WeWork, which is burning cash at an alarming pace.
On June 30, WeWork had $2.47 billion in cash and cash equivalents. However, that cash may only last for a couple of quarters—the company invested $2.36 billion in this year’s first half. The Wall Street Journal reports that WeWork will need $19.6 billion in financing up until 2026. The company is not expected to be profitable until then.
What the WeWork IPO delay means
WeWork’s IPO may have been rushed because of economic indicators predicting a slowdown. The IPO’s postponement creates a lot of uncertainties. Any negative development on the trade war front may steer investors to safety, making risky IPOs of loss-making companies less desirable. Geopolitical tensions, such as the weekend attacks on Saudi Arabia’s Aramco facilities, could have a similar effect.
The fallen unicorns
In the first few months of this year, there was chatter about new-age disruptors going public. Markets were largely optimistic, with S&P 500 (SPY) surging 13% during the first quarter. The trade war had yet to escalate. While there were questions about unicorns’ profitability, optimism kept those voices suppressed.
Fast forward to September, and those unicorn stocks are deep in the red. Uber has fallen 17.2% since its IPO in May, Slack (WORK) has lost over 30% since its sensational public debut in June, and Lyft (LYFT) has lost almost 40% since its IPO in March. Key factors in this downfall appear to be inflated private valuations, lack of a clear path to profitability, overreliance on revenue growth, and manufactured metrics. Let’s review the public debut history for some of these stocks.
How Uber and Lyft have cost shareholders billions of dollars
Uber was the poster child of startups slated to go public this year. In fact, other startups tried to replicate its ride-hailing model for other uses, giving birth to the term, “Uber for X.”
Just days before Uber’s disastrous IPO in May, there were talks of the company going public for $90 billion. The fact that Uber had to concede some markets to competition didn’t seem to matter to management, nor did the fact that Uber was losing billions. In fact, at the height of the frenzy, Uber even compared itself to Amazon (AMZN). The logic was seemingly straightforward. Like Amazon, Uber was a platform not expected to turn profits for years to come.
Uber finally settled on $45 per share for its IPO, valuing itself at $75 billion. However, markets were quick to punish the stock, making Uber’s IPO the worst in history. Ever since, Uber has failed to sustain even its lower-end valuation. Yesterday, Uber closed at $34.43, down 24% from its IPO price.
Uber’s rival, Lyft, was the first major unicorn to go public. While Lyft stock climbed after its debut, it has been on a downward spiral since. Uber and Lyft both got good news yesterday after HSBC upgraded the stocks to “buy” from “hold.”
How Slack stock slid after its grand public debut
Slack (WORK) had a memorable and unusual public debut. The company went public without an IPO and without bankers’ help. The stock opened 47% higher than the reference price of $26 set by the New York Stock Exchange.
However, after the honeymoon period was over, investors and analysts started questioning Slack’s economics. Meanwhile, Microsoft Team (MSFT), which is three years younger than Slack, surpassed Slack in terms of daily active users. Slowing revenue growth is also raising questions about Slack’s high revenue multiples. These factors, combined with rising competition from Microsoft Teams and Facebook Workplace (FB), are hampering Slack’s stock price.
Which unicorns have suffered the biggest fall?
Masayoshi Son’s Softbank Vision Fund (SFTBY) reported $5.5 billion in unrealized gains in the quarter ended June 30, primarily because of Slack’s successful public debut. However, the same investment could turn into losses this quarter—Slack stock has fallen since the end of June. Uber, which led to losses for the fund in the quarter ended June 30, has also fallen this quarter. However, the biggest shock may come from WeWork’s IPO.
The unicorns’ fall may also put fundraising for Softbank’s Vision Fund 2 into question. Apple and Microsoft have signed up to be limited partners in the $108 billion fund, which is set to focus on AI startups.