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WeWork's IPO Filing Is a 'Masterpiece of Obfuscation'

Earlier, I wrote a piece about WeWork's initial public offering filing and discussed some of the dubious links between CEO Adam Neumann and the company that he founded. While reading the company's S-1, I was struck by how complicated the whole business seemed, often needlessly so. After all, how complicated does a real estate company, whose entire business model is essentially just lease arbitrage, really have to be? The same question was posed in a segment on Bloomberg by IPO analyst Rett Wallace.

More confused rather than less confused

Wallace is the CEO of Triton Research, an investment analysis firm that has a track record of calling out dubious IPOs, including Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT). Wallace labeled the IPO filing a "masterpiece of obfuscation:"

"The challenge with this document is that 383 pages later I found myself more confused rather than less confused as to what the actual economics are. And really the only reason this is a particular issue for this company is a question of burden of proof. Like if you lose $1.6 billion on the bottom line, you would think that you would be motivated to make it really easy for investors to understand why they should hand over $3.5 billion more to you. But they obviously decided that they didn't have to do that."

That said, he thinks that some institutions and individual investors may still buy the IPO because they feel like they can't afford to not get involved:

"What's interesting about this story is to see if investors feel like they have to get it [WeWork], and the only way they would do that is if they felt it was going to trade away from them ... Fear of missing out is a very big motivator for investors in these things."

How to value?

He also spoke about the difficulty of valuing growth stocks that do not currently have any earnings or cash flow, but that claim that they will be in a position to generate money at some point in the future. You can't use a discounted cash flow model, because there is no cash flow, and you can't use metrics like price-earnings, because there are no earnings. This is why Triton scores IPOs on obfuscation:

"Pinterest (NYSE:PINS) is a pretty good example [of a company that doesn't make money but has a clear plan] -- they don't make money today, but you can sort of look at the numbers that they gave you and say 'Okay, I can sleep at night, I don't have to have a heart attack about this. This company could actually make sense on a cash flow basis, at some point.'"

In fact, according to Triton's own research, the higher the degree of obfuscation (for which i has a proprietary index), the less well an IPO performs (on average). Warren Buffett (Trades, Portfolio) has said in the past that a management that goes out of its way to confuse its shareholders is not a management you should want to be involved with. Would-be WeWork investors should bear that in mind.

Disclosure: The author owns no stocks mentioned.

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This article first appeared on GuruFocus.