Don’t Buy WeWork Stock After the IPO - Buy This One Instead

On July 23, real estate company WeWork announced its IPO for September 2019. But investors looking to buy WeWork stock after the IPO should pass.

WeWork is one of the largest real estate companies in the world with a valuation of $47 billion. Investors eager to get a slice of this firm could turn it into the second biggest IPO this year, behind Uber Technologies Inc. (NYSE: UBER).

But jumping into the WeWork IPO could be a mistake.

We'll tell you everything you need to know about the firm, including why we're skeptical this stock is worth adding to your portfolio.

Plus, we have an even better play than WeWork stock that you can get into right now...

What Is WeWork?

Founded in 2010, WeWork is a New York--based real estate company. But it's not just any type of real estate company - it offers office spaces through a non-traditional business model.

It leases out "shared workspaces" to everyone from freelancers, entrepreneurs, and startups to small businesses and large companies.

Through WeWork's monthly fees, members have access to more than just the office space. These benefits include education, workshops, internal social networks, health insurance, and WeWork summer retreats.

Depending on the level of membership, WeWork's prices and benefits vary. The cheapest option is $45 a month for community access and the ability to book workspaces. The regular use of shared workspaces starts at $190 per month, and the more expensive options can cost over $500 per month.

WeWork has expanded to over 562 locations around the world. On top of that, it has acquired over 466,000 members, according to The New York Times.

Beyond that, WeWork's 2018 revenue was $1.8 billion. That's a 103.2% increase from 2017's $886 million.

And this rapid expansion has attracted quite a few big-name investors.

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Since its founding, WeWork has sold over $23 billion worth of shares to SoftBank Group Corp. (OTCMKTS: SFTBY). But other investors include JPMorgan Chase & Co. (NYSE: JPM), T. Rowe Price Group Inc. (NASDAQ: TROW), Fidelity, Benchmark, and Goldman Sachs Group Inc. (NYSE: GS).

Even Chinese companies have taken an interest. Jin Jiang International Holdings, Legend Holdings, and Hony Capital are all investors in WeWork.

These investments have pushed WeWork's valuation to $47 billion. Once WeWork's IPO goes live, it's expected to raise an additional $5 billion to $6 billion in capital.

But the massive valuation and revenue growth has investors overlooking some of WeWork's flaws.

WeWork's losses are massive. While its revenue hit $1.8 billion in 2018, it lost $1.9 billion after its expenses and costs were factored in. And in the first three months of 2019, those losses grew by another $264 million, according to The New York Times. That means it's not even close to profitability right now.

Plus, it's competing in a highly saturated market. It's up against several profitable firms with revenue ranging from $3 billion to $60 billion. Some of these companies include Simon Property Group Inc. (NYSE: SPG), Gecina SA (EPA: GFC), and Boston Properties Inc. (NYSE: BXP).

And it doesn't boost our confidence that WeWork's CEO, Adam Neumann, has cashed out over $700 million ahead of the WeWork IPO as well. That's a red flag that suggests he's not confident in the company's long-term success either.

So, with WeWork's losses, Adam Neumann cashing out, and the stiff competition it's up against, WeWork stock is an IPO that investors should likely avoid.

Of course, we still don't know what WeWork's IPO price will be. It could plunge to a level that would be worth a speculative bid. But considering the hype surrounding the company, we'll likely be passing on the stock.

In the meantime, we have an even better play on the real estate market than WeWork stock. In fact, our Money Morning Stock VQScore™ gave this play a score of 4.75. This means our proprietary stock ranking algorithm predicts the stock has breakout potential.

Plus, it offers a whopping 7% dividend yield with a 41% upside within the year for investors who buy shares today...

The Best Alternative Play to WeWork Stock

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Instead of buying WeWork stock, investors should look to Brookfield Property REIT Inc. (NYSE: BPR).

BPR is a U.S.-based companion REIT for Brookfield Property Partners LP (NASDAQ: BPY).

BPR and BPY are both spin-offs of Brookfield Asset Management Inc. (NYSE: BAM). Forbes says BAM is the largest real estate company in the world. In fact, it has a market cap of $48.9 billion.

BAM created BPR and BPY to be economically the same. The difference is BPR offers investors the structure of a REIT while gaining exposure to BPY's properties.

BPR and BPY offer identical assets to investors. In fact, both pay the same high-yield dividend of 7%. Plus, they offer the same dividend growth rate and distributions. And BPY lets you exchange BPR shares for BPY stock.

But since BPR is a REIT, it has a different tax structure. And this REIT's tax structure has some advantages you may not get with BPY. REITs have to pay 90% of their taxable income to investors. So, BPR offers greater tax savings to shareholders. In fact, investors can deduct 20% of REIT dividend payments from income taxes.

With BPR, you have the advantages of a REIT while gaining exposure to the biggest global real estate firm.

According to MarketWatch, BPY has $86 billion worth of assets over five continents. Forty-two percent of BPY's assets are in retail properties like retail stores. And 41% of these assets are in office space. Both of these types of assets produce up to 12% in annual net returns.

BPY's most famous properties include New York's Brookfield Place and Hudson Yards. And there are also the Canary Wharf in London and the Fashion Show Mall in Las Vegas.

On top of that, BPY has a long list of renowned companies using its properties. There's Gucci, Ulta Beauty Inc. (NASDAQ: ULTA), LVMH Moet Hennessy Louis Vuitton SA (OTCMKTS: LVMUY), Prada (OTCMKTS: PRDSY), Capri Holdings Ltd. (NYSE: CPRI), Cheesecake Factory Inc. (NASDAQ: CAKE), Buffalo Wild Wings, Brinker International Inc. (NYSE: EAT), and plenty more.

The rest of BPY's 17% of assets are BAM's private real estate funds. And these funds have a history of strong performance. Their annual net returns every year have averaged over 20% from undervalued assets.

BPR tax savings, properties, and all-star list of renters are incredible. But what's even more impressive is its year-end 2018 financials. BPR made $4.1 billion in net income for 2018.

Meanwhile, one of its competitors, Simon Property Group Inc., has a market cap of $51 billion and made just $2.4 billion in net income in 2018.

Not only is BPR extremely profitable, but its properties are also gaining value. In a three-year period ending in 2018, BPR's net income rocketed 200%. And from 2017 to 2019, BPR's funds from operations (FFO) jumped almost 30%.

Brookfield also has a 95.3% renter retention rate. But BPR is still considered undervalued. BPR's 2019 projected price-to-FFO rate is just 11 at the moment. That's 36% lower than the average ratio of 17.1 for REITs.

But what makes BPR such a great REIT is its massive 7% dividend yield on top of the kind of upside you don't typically see in REITs.

BPR shares are trading for $19.37 right now. With a target price $27 per share, investors could see a 41% upside within the year.

But since it has a VQScore of 4.75, Money Morning thinks this REIT could rocket even higher.

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