How did WeWork get such a high valuation if its making such big losses?
After some debate in the office and lots of commentary from various talking heads about the subject, I sat down and read the company’s S-1 filing and kept reading until I’d figured it out because it was driving me nuts. And the fact is, yes they do make money, and yes they probably will make a lot more.
See that little green bar in the middle, that’s their real operating profit on each location or ‘Contribution Margin’ as they like to call it. Out of $1.349bn in revenues, they made $142m in cash operating profits. And if they consider rent free periods in the calculation then from an accounting perspective that profit goes up to $340m. Realistically a 10%-25% operating margin on each building, and the buildings are largely self-sustaining after stabilisation, and have 15 year leases. So that’s 15 years of 10%-25% operating margin.
But the company is more than doubling its number of locations every year and spending huge amounts on marketing which result in the heavy losses which are so widely reported. Notice how the revenues and the losses are doubling almost in lockstep, as the number of leases signed also doubles. (you may have to squint, the copy is a bit low-res)
So in theory, if WeWork were to stop expanding, get rid of all the marketing expenses, centralised costs etc etc then it might actually be profitable today.