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WeWork’s pre-IPO troubles serve as reality check for start-ups as ‘growth at any cost’ dies

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A man enter the doors of the ‘WeWork’ co-operative co-working space in Washington, DC.

Mandel Ngan | AFP | Getty Images

WeWork has become a cautionary tale for private equity and venture capital executives who are learning that growth at all costs doesn’t always cut it in public markets.

The real estate start-up has seen a number of set-backs in recent weeks, including a dramatic cut in its valuation and its biggest outside investor, SoftBank, urging the company to shelve the offering.

Mark Goldberg, partner at Index Ventures, said those events are changing conversations about what it means to be IPO-ready and the “pendulum is swinging back to a focus on cash flow instead of growth at all costs.”

“The concerns around WeWork’s valuation are a splash of cold water in the face of many private-company CEOs and CFOs in Silicon Valley — especially those with capital-intensive models,” said Goldberg said. “It’s shaking up the conversation in board rooms around what metrics a company should prioritize.”

Sources told CNBC’s David Faber earlier this week that the valuation target for the real estate company was being cut by roughly $20 billion because of weak demand. The company had been valued at $47 billion after its last private funding round. But it’s still heading towards an IPO. On Friday, Faber was hearing the valuation could be $15 billion or lower.

On Friday, the We Company, owner of WeWork announced plans to list on the Nasdaq. It is also changing corporate governance to lessen CEO and founder Adam Neumann’s voting power.

WeWork revealed a $900 million loss for the first six months of 2019 on revenues of $1.54 billion in its filing to go public. But it’s hardly the only company to head for public markets with huge losses. Uber went public in May after staying private for a decade, funded by venture capital bets from SoftBank, Google, and the Saudi Arabian government. The ride-hailing company lost $5.2 billion in the second quarter. Uber’s rival Lyft, posted a 2018 loss of $900 million ahead of its March IPO.

Management teams may start steering companies towards profitability sooner, Goldberg added.

“In the case of WeWork, they are learning that the North Star they’ve been following for years may have been misleading,” he said. “The public markets are sending a strong message that profitability matters.”

Many companies have had relatively easy access to funding despite the monster losses. “It was all about growth at all costs; now it’s about sustainable growth,” Goldberg said.

Jihan Bowes-Little, managing partner and co-founder of Bracket Capital, said certain aspects of WeWork’s struggles don’t apply to every money-losing peer. Still, he said private market investors are rethinking steep losses more broadly, and turning towards companies that “combine high-growth rates with a focus on strong unit economics.”

“I do think the weak demand for the IPO is significant, particularly with respect to the extent to which both public, and private, market investors are focusing on strong unit economics in addition to user/customer growth,” he said.

IPO dreams meet reality

Public market investors have been burned by some money-losing IPOs in the past two decades.

Renaissance Capital looked at the companies with the biggest losses over the past two decades in the 12 months ahead of their IPO. Uber had the deepest losses of any company ahead of its IPO, according to the data, followed by WeWork in second place. All but one, a company called Sea, which shifted its strategy from a payments company to a live gaming platform, is under water. Uber is down 25% from its IPO price, while Lyft has dropped 35%.

“It’s a cautionary tale — large, money-losing IPOs tend to be problematic for investors,” said Kathleen Smith, Principal at Renaissance Capital, a provider of institutional research and IPO ETFs. “Investors should be really cautious about how easy it is to how dangerous these stocks can be in the public market.”

Smith said one reason is robust private markets, where investors are willing to incubate companies for years, “without them having to show they can earn money.” WeWork was a healthy signal for the IPO market, and a sign that markets may avoid getting “overheated.”

Columbia Business School professor Len Sherman and former senior partner at Accenture, said while he doesn’t want any particular start-up to fail, WeWork’s troubles could be a necessary check on venture capital valuations.

“SoftBank in particular has done a pretty grave disservice to the whole private capital marketplace and valuations,” he said. “WeWork will have a chilling effect on some of these private equity companies thinking they can just keep pumping valuations up artificially, and still walk away with a bundle of money.”

Low demand for WeWork could be proof that the IPO market is still the most “effective arbiter around,” according to Sherman.

“I hope this brings us back in a more rational direction,” he said.

Others see the issue as more unique to WeWork, not a signal of impending change in private markets.

Sheel Mohnot, a partner at early-stage venture capital firm 500 Startups, said the lack of enthusiasm from some investors shows what the true appetite is for the company but it won’t have strong trickle down effects.

“I don’t think there are many broader implications — many of us looked at WeWork and said it wasn’t working,” he said. “There’s something wrong with that company, not the overall market.”



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Roku could fall another 30% before finding a bottom, chart suggests

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The streaming wars may have claimed a new victim.

Roku shares plummeted nearly 30% last week, its worst weekly performance stretching to its 2017 IPO.

The streaming platform stock was pummeled Friday after Pivotal Research slapped a sell rating and $60 price target on it, fearing a rush of competition in the space. It was crushed days earlier after CNBC owner Comcast announced it would offer a free streaming box to its internet customers.

It could get even worse, according to Craig Johnson, chief market technician at Piper Jaffray.

Roku has “violated the uptrend support line off those April lows of this year. You’ve got some support that comes in at $113. But purely based upon the charts, your best support comes in all the way back down at the 200-day moving average. So you can see the stock trade back down to $81, maybe even $75,” Johnson said Friday on CNBC’s “Trading Nation.”

A move down to $75 marks 30% downside from current levels. It has not traded at that price since May.

“The risk/reward isn’t favorable. Even though the stock is up, it has sold off quite a bit in here recently. I still think you got about 30% downside and maybe a relief rally of 7% upside, so I’d be selling into this move,” said Johnson.

Quint Tatro, founder of Joule Financial, does not see Pivotal’s note on Roku as the stock’s death knell.

“Obviously, the stock got way overheated, trading 25 times sales, but [Pivotal’s] rationale regarding losing market share I don’t agree with. You have to understand, this is a cord-cutting product so their whole rationale is that the cable companies are going to offer their own device for free in order to compete. I’m a Roku user. I own six of them in our home and office. I have not had cable for years so I would not switch to a cable device,” Tatro said on the show.

Tatro says a pullback in Roku’s share price to 14 to 15 times sales, around $100, would make him a buyer. Roku would need to fall 7% from Friday’s close to get to that level.

Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC and CNBC.com.

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The market rotation this month may have been driven by a technicality

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A trader works at the New York Stock Exchange in New York.

Wang Ying | Xinhua News Agency | Getty Images

What exactly happened during the “once in a decade” stock market rotation earlier this month that rocked investors? It might’ve just been a one-off technical move and not based on fundamentals.

A huge rotation out of momentum into value names took place suddenly last week. Many read the phenomenon as a warning sign as stocks with superior growth have led the market’s bull run in recent years and said a rebound in interest rates was the catalyst. However, the reversal in momentum, which seemed to abate this week, could be explained by a sudden stop in tax loss harvesting, some on Wall Street said.

The idea is that investors often sell losing stocks to lower their tax bill from the capital increases, a technical move that’s quintessential of a momentum trade — chasing winners and dumping losers. The amount of such activity might have decreased significantly last week due to speculations the Trump administration would pass a bill to reduce capital-gain taxes, therefore reducing the incentive to sell their losers.

“It’s quite possible some of the dominant robo advisors could have assumed that the U.S. administration would indeed follow through with its proposal on Sept. 9, and decided to change their optimization to take this into account,” Barclay’s head of equity derivatives strategy Maneesh Deshpande said in a note on Wednesday.

President Donald Trump earlier this month floated a proposal to tie capital gains taxes to the inflation rate, which could lower the taxes investors pay on profits from selling assets. He eventually ruled out such a plan on Sept. 11. But the discussion around the proposal last week coincided with the change in stock leadership that shocked many investors.

Tax loss harvesters might have stopped selling losers and adding winners on the prospect that capital-gains taxes would go down, which could make tax loss selling less beneficial. Such a change could have caused the downturn in momentum due to less selling of falling stocks and less buying of rising names.

The amount of active tax loss harvesting has ballooned over the years as robo-advisers, which automatically allocate assets in a tax efficient way, gained popularity on Main Street. Robo-advisers now manage about $1 trillion assets, up from $240 billion in 2007, according to Barclays.

“Of course, it is also entirely possible that some other investors would have put on the trade in anticipation of such a proposal,” Deshpande said.

The iShares S&P 500 Value ETF hit its highest level since January 2018 on Sept. 11 as the rotation hit its pinnacle.

Value, cyclical companies with low prices relative to earnings and book values tend to be sensitive to economic growth. However, embracing the group without a material change in the economy doesn’t make a lot of sense, analysts warned.

“Absent an improvement in underlying economics, we believe that the recent shift in leadership is unlikely to persist,” Jonathan Golub, chief U.S. equity strategist at Credit Suisse said in a note Monday.



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‘Game of Thrones’ ends run with best drama award, 59 total Emmy Awards

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D. B. Weiss (C, speaking), David Benioff (3rd L) and cast and crew of ‘Game of Thrones’ accept the Outstanding Drama Series award onstage during the 71st Emmy Awards at Microsoft Theater on September 22, 2019 in Los Angeles, California.

Kevin Winter | Getty Images Entertainment | Getty Images

Despite mixed fan and critic reactions to the final season of “Game of Thrones,” the eight-season epic took home the top prize in the drama category at the Emmy Awards on Sunday.

Closing out the 71st annual television awards ceremony, David Benioff and D.B. Weiss thanked creator George R. R. Martin for entrusting his book series to the young producers more than a decade ago and praised the cast and crew for their work on the program.

Since 2011, HBO’s “Game of Thrones” has garnered 160 Emmy nominations and taken home 59 prizes for everything from acting and editing to special effects and sound mixing.

On Sunday, the program earned two Emmys, one for outstanding supporting actor, which went to Peter Dinklage for his portrayal of Tyrion Lannister, and one for outstanding drama.

Earlier in the month, “Game of Thrones” won 10 additional awards during the Creative Arts Emmy ceremony.

“Game of Thrones” final award tally falls short of the 67 Emmys that “Saturday Night Live” has accrued over its 44 seasons. “SNL” earned two statues on Sunday, one for outstanding variety sketch series and one for outstanding directing.

The final season was widely criticized by fans who felt the pacing and its treatment of previous character developments were not up to par. Still, the show continued to have record-breaking viewership.

Each episode, save for one, topped viewer counts from the season seven finale, which was the series high prior to season eight’s release.

Disclosure: Comcast is the parent company of NBCUniversal and CNBC.



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