Below is a re-post of part of our Closer report (available to Bespoke Institutional members) from August 14th.

We have not been big fans of most major tech IPOs so far this year. Uber’s IPO (UBER) has been a pretty big failure so far: in addition to pricing at the bottom of its range and way below expectations in the lead-up to marketing, the stock has dropped 25% since. WeWork (WE) looks much worse. The company spends about 80% of total revenues operating its coworking spaces, with two-thirds of revenues going to expenses related to new office openings. Another 43% of revenues go to other pre-tax expenses.

As a result, the company’s pre-tax margin is –79%, with operating margins of –90%!  Even adjusted EBITDA margins are hugely negative: -36.8%.

The metric the company claims is its economically relevant performance statistic is “contribution margin” which excludes location start-up costs, non-core operating expense, all sales and marketing costs, all growth/new development investments, all general and administrative expense, all depreciation and amortization, and all stock-based compensation. This is about as close to “earnings before everything” as you can get and is completely ludicrous as a way to judge a business’s costs; we strongly urge readers to evaluate the business by other, more traditional metrics that reflect total costs, growth funding, and liabilities to shareholders.

This analysis of course leaves aside the massive concerns elsewhere in the S1: self-dealing involving properties the CEO owns, possible securities law breaches, hideous financial and legal entity complexity, lease obligations north of $34bn (although a more modest $18.5bn at discounted present value), and an extremely shareholder unfriendly governance structure that concentrates massive power with the CEO. While WeWork (WE) may survive as a company, it contains a massive host of risks that are suitable for only a very narrow range of investors, if anyone; there are many, many companies out there that don’t throw up an almost comical forest of red flags.  This analysis was originally published in our nightly Closer report on August 14th.  Start a two-week free trial to Bespoke Institutional to access The Closer and the rest of Bespoke’s suite of Institutional products.

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