How solid is Softbank’s road to recovery?

WeWork announced Q1 results on Friday, which provided a glimmer of hope for the scandal-riddled co-working company. WeWork burned through $482M of cash in Q1, compared to $1.4B in Q4 2019. WeWork's new cash position is therefore $4B, which means the company should have adequate runway to survive the Covid downturn.

WeWork also revealed revenue growth, with sales increasing 45 percent from the previous year's Q1 to $1.1B. Both location count and membership count also grew, while WeWork collected 70% of its April rent, higher than the commercial real estate average of 67%. Another bright spot for the company is the percentage of revenue from large corporate clients, which it deemed to be more resilient in this crisis and better positioned to return. These large corporate clients accounted for 45% of WeWork's total client counts, up 2% from year-end 2019. Over time, the percentage of revenue generated by large clients will likely account for an even larger portion of its revenue mix.

But Q1 was largely devoid of COVID, and new management is already under pressure to boost confidence in Q2. WeWork paid 80% of its rent in April and May to its own landlords and aims to pay all of it when it can. As most of the largest commercial real estate owners are also WeWork investors, the company likely has some wiggle room, but 2020 will certainly be a pivotal and challenging year for WeWork. How it fairs post-COVID-19 will be telling.
 

WeWork’s backer Softbank reported year-end earnings on Monday, May 18th (18B loss).  Top-line numbers might not be pretty, but Softbank’s underlying portfolio companies still show solid industry positioning within the firm's investment theses focused on mobility, flexible working, and SaaS.

These companies are well-positioned to usher in the new normal, as their potential clients are more willing to spend on software that ensures a better work experience. Softbank's next-largest investment category is semiconductor manufacturing. Software needs continued hardware development to power, and if the public markets are any indicator, this area saw tremendous growth in 2019 and is up on in 2020, a stark departure from most of the rest of the public market stocks.

Lastly, of course, the third-largest area of Softbank’s portfolio is real estate, namely WeWork. But as mentioned above, WeWork might now be looking up. While there is still an ongoing lawsuit between Softbank and WeWork regarding the derailed $3B secondary offering, We and Softbank are still very much tied together.
 

So what went wrong for Softbank? Its belief that money can create market share winners and that winners will eventually take all turned out to be flawed. The model ended up bypassing the natural selection process required to build strong companies. Unknowingly, the money disguised bad management (WeWork), weak business models (Wag), and unconvincing value propositions (remember Zume?).

Now perhaps Softbank will focus on being an actual VC investor, offering not only capital but also help so that its portfolio companies can survive and ultimately thrive. 

External pressure is also being applied to Softbank. As PrivCo has previously covered, activist investor Elliott is now forcing changes and capital discipline on Softbank, leading to a recovery in 2020. Contact PrivCo for a full report on Softbank's holdings and performance.