The Wall Street Journal - 23.10.2019

B14| Wednesday, October 23, 2019 THE WALL STREET JOURNAL.

Life Goes On After WeWork

Asspectacularastheunicorn’svaluecollapseis,itsimpactwillremaincontained

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FINANCIAL ANALYSIS & COMMENTARY

UPS Shows It Can

Deliver the Goods

Challenges still loom for the company, but in the

near term, at least, its investments should pay off

United Parcel Service faces

some big challenges in the years

ahead. That doesn’t mean it can’t

win Christmas.

The shipping giant reported

third-quarter results on Tuesday

that, in the face of investors’ rosy

expectations, counted as a letdown.

Earnings beat estimates, but that

appeared to be at least in part due

to a lower tax rate than analysts

had modeled, while sales came up a

bit short. U.S. domestic package de-

mand was strong, but its interna-

tional and supply-chain and freight

businesses were sluggish, reflecting

a slowing global economy and trade

troubles besetting manufacturers.

Compounding the disappoint-

ment, UPS announced that Chief

Operating Officer Jim Barber, who

was viewed as Chief Executive Da-

vid Abney’s heir apparent, will re-

tire at the end of the year. UPS

shares slipped 2%.

The results temper some of the

optimism that took hold following

UPS’s second-quarter results that

its massive capital spending plan is

bearing fruit. They also serve as a

reminder to investors of all that

could go wrong.

Unlike FedEx , which in August

severed ties with Amazon.com , UPS

has been expanding its capacity to

handle more packages from the in-

ternet giant and other online sell-

ers. The risks of that strategy are

manifold. Amazon has been building

out its own shipping network, and

over time that may erode the

amount of business it does with

UPS. Other major retailers are de-

veloping so-called omnichannel

businesses, that include options

such as picking up online orders at

stores, which could cut out package

deliveries. E-commerce platforms

such as Shopify could allow smaller

shippers to grab a larger share of

internet sellers’ business.

UPS thinks all of these challenges

are surmountable, seeing its ability

to deliver packages the next day as

putting it in the sweet spot of

where e-commerce is heading.

But the more immediate issue for

UPS is how it will handle the holi-

days, and here it could see all of its

recent investments pay off. The

company this year has added planes

and new capacity at its sorting fa-

cilities, allowing it to deliver more

packages quickly. That should make

it the default solution for many re-

tailers during the shopping rush.

When the company next reports in

January, investors could find its re-

sults much more pleasing.

—Justin Lahart

The problem with a stunning

photo is that its subject will forever

be measured against it.

Snapchat’s parent company Snap

Inc. faced this high hurdle when it

reported third-quarter earnings on

Tuesday, after its previous report in

which it posted record user growth

as a public company. Snap added

seven million daily active users in

the latest period compared with the

four million Wall Street was antici-

pating. Revenue also jumped 50%

year over year to $446 million, the

company’s best growth rate in over

a year.

Still, Snap shares fell in after-

hours trading, as the company’s

forecast for revenue and adjusted

earnings before interest, taxes, de-

preciation and amortization made

less of a lasting impression.

Fears of slowing growth have

weighed on Snap lately. Shares have

fallen 17% over the past month, al-

beit after having earlier rallied more

than 200% this year. Following a

stellar second quarter that was bol-

stered by a revamped Android de-

sign and new viral lens features, in-

vestors have begun to fear

Snapchat’s growth story may be

short-lived, especially in the face of

hefty competition from the likes of

Instagram and TikTok. Short inter-

est for Snap shares hit 17% of the

Snapchat’sdailyaverageusers

Source: the company

200

0

50

100

150

million

2016 ’17 ’18 ’19

A stunning reversal of fortune

for an experimental Alzheimer’s

disease drug has Biogen shares off

the mat. But investors shouldn’t

abandon their skepticism just yet.

Tuesday morning Biogen said it

plans to pursue regulatory approval

for aducanumab, an investigational

treatment for early Alzheimer’s dis-

ease. This was a shock to investors,

as the company had seemingly

thrown in the towel on the drug af-

ter a pair of Phase 3 studies of the

drug back in March.

Biogen said the decision to re-

verse course came after new data

from a larger patient set became

available, and said it based the new

decision on conversations it had

with Food and Drug Administration

regulators. The company also re-

ported third-quarter sales and

earnings above analyst estimates.

Shares ended trading 26% higher.

Some optimism is warranted.

Biogen shares were trading at less

than seven times forward earnings

as of Monday’s close, according to

FactSet. Excitement over earlier ad-

imagine the FDA asking for another

late-stage efficacy study before any

approval. That would likely push

any possible approval back by

years, quelling today’s optimism.

What’s more, even if regulators sign

off, insurance companies will likely

need to be persuaded that the drug

can slow disease progression before

they pay for it.

Biogen shares were trading at

less than seven times forward earn-

ings for a reason. The company

faces increasing competition and in-

tellectual-property challenges in key

products, including its portfolio of

multiple sclerosis drugs and a spi-

nal muscular atrophy treatment.

Before Tuesday’s news, Wall Street

analysts had been expecting the

Biogen top line to fall from $14.1

billion this year to $13.1 billion in

2023.

To truly overcome those chal-

lenges, aducanumab will eventually

need to be flying off the pharmacy

counter. Even after Tuesday’s sur-

prise, that scenario is far from en-

sured. —Charley Grant

Biogen’s Alzheimer’s Revelation Isn’t So Simple

ucanumab data had pushed that

valuation to about 25 times forward

earnings back in 2015.

In the recent past, the FDA has

shown a willingness to approve

drugs in areas of major unmet

needs, even when they have under-

whelming efficacy data. Analysts at

Leerink said in a note Tuesday that

Biogen shares are worth $485 to

$525 in a scenario with adu-

canumab reaching the market and

generating blockbuster sales. To-

day’s market price is more than a

40% discount to that valuation.

That hardly means the stock is

without risk, however. With a data

picture this cloudy, it isn’t hard to

An FDA request for

another late-stage study

would likely push any

approval back by years.

The office-sharing firm, co-founded by Adam Neumann, has lost nearly $40 billion in value in a few months.

KELLY SULLIVAN/GETTY IMAGES FOR THE WEWORK CREATOR AWARDS

free float ahead of Tuesday’s re-

sults—easily topping all of its major

social-media competitors.

On the bright side, Snap said it

plans to hit its previously stated

“stretch goal” of break-even or bet-

ter on adjusted Ebitda by year-end.

Profitability in the fourth quarter,

even on these generous terms,

would be timely for Snap, given in-

vestors’ sudden emphasis on tech

companies’ bottom lines.

Snap now says it expects user

growth to moderate on a sequential

basis in the fourth quarter. With

that in mind, the question becomes

just how quickly the company can

turn its growing user base into a

sustainable business. Snap still

burned $84 million in cash during

the third quarter. Average revenue

per user grew at the slowest annual

clip in at least two years, according

to FactSet. Analysts expect this

growth to abate further over the

next four quarters.

Snap is banking on its traction in

video platform Discover and on aug-

mented reality to continue to attract

users. It also hopes recent updates

to self-service ads will entice new

advertisers to its niche platform. It

can’t afford to fail. At roughly nine

times forward sales, Snap shares

continue to trade at a premium to

competitors Facebook and Twitter.

Industry data show limited ad-

vertiser interest could impose a

near-term growth ceiling. EMarketer

estimates Snapchat will command

just 0.7% of the U.S. digital-ad mar-

ket in 2019, while a recent survey by

RBC showed it was the least pene-

trated of the major U.S. social-media

apps in terms of advertising dollars.

That survey showed more than

three-quarters of advertisers

weren’t allocating any online budget

to Snapchat, and that advertiser in-

terest in the platform had waned

between April and September.

As Snap’s stock has climbed, so

has the pressure for it to continue

to deliver. Blemishes in future finan-

cial results will only get more diffi-

cult to filter.

—Laura Forman

How will history view WeWork?

The office sharing company and

its co-founder Adam Neumann

epitomize disrupter culture taken

to the extreme. While yet to be-

come a public company, its evapo-

ration in value and rescue by Soft-

Bank is the sort of spectacle not

seen since the financial crisis.

With a fresh $8 billion valuation,

according to The Wall Street Jour-

nal, the company has lost nearly

$40 billion in value in just a few

months.

It isn’t only an “emperor has no

clothes” moment for Mr. Neu-

mann, who reaped a personal for-

tune and effectively is being paid

even more to go away, but for

SoftBank. The Japanese company

has played a central role in several

private technology firms and is

raising more money from the likes

of Saudi Arabia’s sovereign-wealth

fund to do more of the same.

But, whatever the outcome of

the debacle for WeWork itself or

even for SoftBank, the episode will

be a footnote compared with, say,

the scary ripples caused by an ail-

ing Wall Street bank or insurer

back in 2008. One reason is that

while confidence in profitless uni-

corns has no doubt been shaken,

the sort of contagion that spread

quickly from one financial institu-

tion to the next 11 years ago isn’t a

factor.

The spectacular shriveling of

value is painful for those invested

in SoftBank or in its portfolio of

companies, but it is more of a cau-

tionary tale than a seminal event

for Wall Street.

WeWork’s impact on the real-

estate market will be limited, too.

It mostly subleases properties

from other real-estate firms, but

those leases are neither geographi-

cally nor commercially concen-

trated. Perhaps WeWork could

cause a slowdown in the office-

leasing sector more broadly given

what are likely to be far more

modest expansion plans going for-

ward, but it won’t spoil the market

in the absence of a broader eco-

nomic downturn.

Even the impact on public and

soon-to-be-public technology firms

is limited. Its $47 billion valuation

was, in hindsight, preposterous,

but the fact that WeWork never

made it through the initial-public-

offering process shows that public

investors aren’t in the grip of a

dot-com-style mania.

In short, WeWork’s impact on

the broader real-estate and finan-

cial market won’t merit its own

chapter in history books. But how

about Mr. Neumann? Every crisis

has its outsize personalities: Long

Term Capital Management’s John

Meriwether, who nearly took down

the global financial system with a

group of financial whizzes; Angelo

Mozilo, the son of a Bronx butcher

who co-founded Countrywide Fi-

nancial, grew it into the largest

U.S. mortgage lender and became

an unrepentant poster child for

housing excess; and Dick Fuld re-

arranged the deck chairs on the

Lehman Brothers Titanic.

Mr. Neumann’s spectacular

salesmanship rivals that of the

best Wall Street survivor but, hav-

ing stalled before the investing

public got a piece of the action, his

legacy is more titillating than his-

toric.

—Lauren Silva Laughlin

UPS’scapitalexpenditures

Source: FactSet

*Through third quarter

$6

0

1

2

3

4

5

billion

2010 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19*

Snap’s Growth Story

Is Losing Some Fans

Individual investors’ steady

diet of fake meat and cannabis

has at least one unusual

side effect: a boon for dis-

count brokers. At the

four big listed online

retail brokerages,

which all have now re-

ported earnings for the

most recent quarter, reve-

nue from lending and bor-

rowing shares in custom-

ers’ portfolios jumped 70%

quarter over quarter to nearly

$260 million.

Usually, these

shares are being lent out

to short sellers. Accord-

ingly, E*Trade Financial

attributed a jump in

revenue to some “spe-

cific names” that are

“well known,” citing Be-

yond Meat Inc. and the universe of

cannabis stocks. Indeed, those

are popular stocks to short.

Individual investors’ hold-

ings are likely a rich vein

for traders looking for

shares to borrow and sell.

As of last week, two

of the three most expen-

sive stock borrow fees in

the market were for Be-

yond Meat and cannabis com-

pany Tilray Inc., according to

a weekly report by S3 Part-

ners LLC.

Online brokers are look-

ing for new sources of rev-

enue after deciding to set

most of their trading

commissions to zero, and

Wall Street is eager to

know what they have

been cooking up.

ANDREY RUDAKOV/BLOOMBERG NEWS

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