Remember the dot.com boom? Followed by the dot.com bust? – well apparently not. As the wheels appear to be coming off the wework floatation, isn’t it about time we took stock (excuse the pun) and looked at the absurd valuations that we are seeing of various businesses? Whether it is tech darlings such as Slack or the gig economy giants of Lyft and Uber – our propensity to overvalue something that shows limited signs of being able to actually make money continues.
Wework is the latest business to prepare to float but if rumours are true – Softbanks investment in the office rental business is turning sour before it even gets to floatation with its valuation of the business being reduced from over $40bn to $20bn.
Like all investments there is risk as much as there is reward. Investments in Slack, Uber et al are understandably based on future potential especially considering that nearly all of these businesses are currently losing money and burning cash but the valuations that are emerging make the stock market appear more like a reverse game of pass the parcel whereby instead of getting a prize when the music stops – you get left with a load of shares that are worth a fraction of what you paid for them.
Wework has expanded significantly and has an impressive property portfolio but it faces a number of challenges. Firstly, it is inevitably exposed to an economic downturn. Long term property deals are fine if you can conversely tie in tenants on long term arrangements but the wework model is built on having an ongoing stream of short term tenants – as such, as the economy faces a downturn so will the demand for space. Secondly, the ongoing need for office space is changing as a number of businesses structure themselves to collaborate via online tools and reduce their need for physical space. The shift to flexible and agile working environments will exacerbate this further.
Equally, the gig economy businesses of Uber and Lyft are facing external threats not only from regulators but also from some of its own workers demanding rights such as holiday and sick pay – all of which will see price increases to the consumer as their cost base increases.
It is not all bad – all of the above businesses are built on solid platforms and have the advantage of significant investment behind them. Uber in particular has one powerful asset that it has yet to fully exploit – data. As we continue to move into a world where everything is about the “here and now”, the Uber infrastructure will allow it to continue to adapt by expanding its physical services beyond the provision of “taxi services ” to delivery. In addition, be able to fully exploit its growing collection of data to help service its customers every needs.
However, the problem with all of these businesses is they are currently built on unsustainable valuations. The market will at some point do what it did in the 1990’s – the bubble will burst and a lot of people will find themselves holding devalued (or even worse, worthless) stock. We will ever learn? Probably not…….