Figures surrounding the WeWork IPO hints at an environment lacking in consistency in reasoning
While tech companies still maintain a strong reputation for their growth and disruptive potential, the case for letting go of them are growing. In the case of large tech companies like Facebook, Google, or Amazon, there’s pressure for them to be more vigilant in policing their platforms, which threatens their profit margins.
On the other end of the spectrum are newcomer firms, bursting onto the scene with IPOs that they hope would appeal to the public. But a sober look at the numbers suggests that the current market for IPOs is built on an unsustainable foundation.
“To last, every system needs order. Yet, in today’s IPO market, there is no consistent, defensible basis for valuing companies,” wrote Brian Hamilton, founder of HamiltonIPO.com, in a piece contributed to VentureBeat.
He argued that the most ideal method to assess the value of a company on the brink of an IPO should be based on cash flow analysis. However, since nearly every company that goes public is losing money, the most feasible method to determine an IPO company’s value is to determine the ratio between its sales and its valuation.
Turning to Beyond Meat as an example, he noted that the company had seen sales of US$88 million and net losses of US$30 million in the year before it went public. At the time of its IPO, it had a valuation of US$1.47 billion, giving it a valuation-to-sales ratio of 17. “Today, since its IPO, its valuation to sales ratio is 107,” Hamilton said.
He then moved on to WeWork, another company with an IPO coming up. Its most recent valuation in the private markets of US$47 billion, he noted, is roughly 26 times the revenue it generated in the previous year; this is in spite of the company losing more money than it’s making in annual revenue.
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“In the good old days of five years ago, even if you were losing money, it was nice if your losses at the bottom were not greater than your total revenue on the top,” Hamilton said.
The Financial Times has reported that WeWork advisors are weighing investor appetite for an IPO valuation between US$15 billion and US$20 billion. Assuming the upper limit, the company would see a valuation-to-sales ratio of 11.
“Another company to go public this year is Slack,” Hamilton continued. Slack saw net losses of US$140 million in 2018, and sales of US$401 million. By the time it went public, it had a valuation of US$16 billion, translating into a valuation-to-sales ratio of around 40.
He then looked at the historical bars set by Google and Facebook. “When Google went public, not only was it profitable, but its valuation to sales ratio was 24,” Hamilton said. “When Facebook went public, it was also profitable, and its sales multiple was 28.” In other words, Slack’s IPO numbers put its valuation-to-sales ratios above those of two of the largest tech firms in the world.
“I’ve never heard a convincing argument that puts the value of a company beyond future expected cash flows,” he said, arguing that tech companies going public are vastly overpriced.
“[T]here is no accepted, reliable, and consistent way to value tech IPOs. … The fact that WeWork is now talking about slashing its valuation in half when it IPOs indicates I’m right. Although half of US$47 billion is probably still too high.”
