Take two property companies, both involved in the same business: renting office buildings, carving them up into smaller spaces and subletting them out to small business tenants on flexible terms. Both operate internationally. The first earns revenues of £2.5 billion in a year and makes a profit of £155 million. The second has a similar annual turnover but makes a whacking annual loss of £1.5 billion. Which company is worth more?
The answer, for those of you who don’t yet understand how stock markets work, is of course the latter. The former company is worth £3.5 billion and the second is worth either £50 billion, £38 billion or £12 billion, depending on which valuation – if any – you believe. What is the precious commodity which the second company possesses which the first does not? Hype – along with the gall to convince investors that you are really a technology company. Succeed in that and the normal rules do not seem to apply. Your shares don’t crash – as many company’s do – when you report a small hiccup which will reduce your profits a little this year. On the contrary, you don’t need to make a profit at all. In fact, the bigger your loss, the better – because it is a sign of your ambition. You are a disruptor — an Amazon or Facebook in the making.
As to the identity of the two companies mentioned above, the first is London-listed IWG and the second is WeWork, currently in the process of being floated in New York. Or at least it might succeed in being floated.
In a sign, however, that investors might just be beginning to tire of heavily loss-making companies which are hyped up to be transformative tech businesses, WeWork’s floatation has somewhat hit the buffers. Once valued by Goldman Sachs at $65 billion, and valued at $47 billion earlier this year when Japanese SoftBank invested in the business, its worth seems now to have shrunk to between $15 billion and $20 billion.
But that might still turn out to be $15 billion to $20 billion on the high side. This week, WeWork’s bonds sunk as income investors start to look at the company in a very different way compared with those who want to ride a surge in capital value. Many have their eyes on two other companies floated this year which have failed to live up to their hype: Uber and Lyft, which have both seen plummeting share prices.
But I don’t suspect this is really the end of hyped shares – just a little pause before starry-eyed speculators start to look for the next thing they can big up in order to make quick Ponzi profits. Anyone who thinks there is even a modicum of common sense in stock markets should remember the story of the loss-making Long Island Ice Tea Corporation which, in 2017, nearly quadrupled its share price overnight by the simple expedient of renaming itself the Long Island Blockchain Corporation (without actually changing its business model away from ice tea). The association with then-booming digital currencies was all it took for speculators to jump on it.