What do WeWork, Uber and Lyft Have In Common?
The answer to this question may become vitally important to the global financial system.
Some of you may guess that they are all Tech IPO's in 2019.
Except that WeWork hasn't managed to go IPO yet. I'll get back to that point shortly.
Some of you may guess that they are all losing money hand-over-fist, and you would be right.
Uber reported a net loss of $5.24 billion for its second quarter of 2019, blaming stock-based compensation costs. By comparison, Lyft lost $644.2 million in the second quarter, representing a significant jump from the $178.9 million it lost a year earlier.
A single company losing more than $5 Billion in a single quarter would be a staggering amount for any semi-healthy company. But Uber has never came close to making a profit at any time, and is now laying off 8% of its workforce just a few months after going public.
To make matters worse for Uber and Lyft, California is about to pass a bill that would correctly identify their drivers as employees. While this is good for drivers and workers in California, it's not good news for Uber and Lyft.
WeWork may be in even worse shape. Its losses are nearly as big as its revenues (in 2018 it lost $1.61 billion on $1.82 billion in revenue).
However, while "they're all losing buttloads of cash" is technically a correct answer, it isn't the answer I was looking for.
The answer I was looking for is: Softbank.
Softbank is a financial conglomerate based in Japan.
It' the 36th largest public company in the world, and the 2nd largest publicly traded company in Japan. In other words, it's enormous.
It's also the biggest investor in Uber.
SoftBank, which poured about $7.6 billion into Uber in early 2018 after the ride-hailing company suffered a series of bruising gaffes, has seen the value of its stake dwindle by the day...In total, SoftBank invested $7.65 billion. That stake, when factoring in the $245.3 million in shares SoftBank sold in the IPO, is currently worth less than $7 billion.
The stock has lost close to one-third of its value since its May IPO.
Losing a third of its price in a few months is bad, but Lyft has plunged 50% since it went public in March.
But that is only part of Softbank's losses this year.
SoftBank bundled its losses from Uber along with other investments in its latest financial report for the three months ended June 30. The company recorded unrealized losses of 195.3 million yen (about $1.84 billion) for “the decrease in the fair values of investments in Uber and others.”
Even enormous financial conglomerates have trouble handling losses of that size.
And yet that isn't the worse part. In fact, that isn't anywhere remotely close to the worst part for Softbank.
The worst part is WeWork.
WeWork’s decision to delay its public share offering after a lacklustre response from investors comes as a blow to Softbank, the Japanese investment giant that has thrown serious sums at several successful tech “unicorns” – and watched as some companies it has backed have floundered.
The WeWork delay saves Softbank, the brainchild of Japanese billionaire Masayoshi Son, from having to write down the value of its $10.65bn investment in WeWork through its Saudi-backed Vision Fund.
Last week Softbank was reportedly urging WeWork, or the We Company as it is now known, to postpone its offering. Valuation of the company dropped to around $5bn- $10bn, less than a quarter of the $47bn originally envisioned.
Softbank is looking at somewhere between $2 Billion and $5 Billion in losses on WeWork alone (my guesstimation).
How serious is this? Bad enough to be concerned.
Masayoshi Son, who built a $15.2 billion fortune investing in tech startups like Alibaba Group Holding Ltd., is betting on himself more than ever, even as his empire shows signs of vulnerability.
The SoftBank Group Corp. founder has pledged 38% of his stake in the Japanese firm as collateral for personal loans from 19 banks, including Credit Suisse Group AG and Julius Baer Group Ltd., according to a June regulatory filing. That’s up from 36% at the start of the year and triple the level in June 2013.
“It lets him monetize a large share of his wealth without foregoing influence over the firm,” said Michael Puleo, assistant professor of finance at Fairfield University’s Dolan School of Business in Connecticut. “But there’s an elevation of crash risk. If the share price falls low enough, he could get a margin call and that could be pretty costly.”
1/ On SOFTBANK
Of the $95B of Vision Fund 1
-$25B came from Softbank itself
-$60B came from Saudis + Abu Dhabi
Of the 80 investments made
-5 had IPOs
-4 are below IPO price
-Only 1 (Guardant Health) is up pic.twitter.com/WPylODCym1
— Josh Wolfe (@wolfejosh) September 19, 2019