WeWork is the company that everyone loves to hate. The co-working brand founded by disgraced co-founder Adam Neumann in 2010 has been immortalized in case studies in business schools as the poster child for corporate governance failure. As all eyes are on the Q4 and 2022 full year earnings release on 16 Feb 2023, this quick take will seek to explore whether any real value exists and what the future may hold for the battered firm.
We will focus on the following points:
1. Compelling value or a looming bankruptcy? - The drastic price decline has seen WeWork’s valuation come down significantly, but cash flow problems on the horizon remain unresolved for a company which has never turned a profit.
2. Is management taking the right steps to salvage the company? - WeWork's management has made difficult cost-cutting decisions to streamline company processes once again.
3. What is WeWork’s competitive advantage really? - WeWork's outsized brand advantage provides significant cost savings on marketing and promotion for the company.
4. Is there light at the end of the tunnel? - In a post-covid world, co-working has received significant tailwinds, but the threat of massive layoffs in the tech industry which dominates WeWork's clientele may be a key impediment to growth.
Compelling value or a looming bankruptcy?
At time of publishing WeWork is trading at a $1.13b market cap, a fraction of its 2021 SPAC valuation at $9b and a far cry from its ludicrous $47b valuation during its first failed IPO. The current share price is down 78.44% in the last 12 months.
Seemingly undervalued based on relative valuation
The company is trading at a Price/Sales ratio of 0.37 (trailing 12 months). A fair comparable would be the only large publicly listed competitor operating at a similar scale International Workplace Group (LON: IWG) which is trading at 0.87. This could hint at a possibility of strong intrinsic value. Physical Occupancy also currently stands at a respectable 72% across its global portfolio (IWG: 74%). You might be asking, where’s the catch? The answer lies in its worrying cashflow situation.
Persistently sky-high operating expenses
Diving into the financials for the first 9 months of 2022, WeWork generated a total revenue of $2.4b, which makes WeWork the largest co-working company by revenue in the world despite having less than a quarter of locations compared to their closest competitor (700 vs 3000). The problem lies in the high operating costs with lease expenses alone amounting to $1.9b. This leaves WeWork with a gross profit of $501 million, which was insufficient to cover other costs such as location expenses ($406 million), selling and administrative expenses ($578m), interest expenses ($116m), and other income items. As a result, the company still reported a total loss of $629m for the nine-month period. This is concerning as the company who has never been able to turn a profit is still burning through their once sizeable cash reserves. To add insult to injury, Fitch Ratings downgraded WeWork’s Long-Term Issuer Default Ratings to CCC from CCC+ in December 2022 which indicates that default is a real possibility. This could potentially deter institutional investors from purchasing company bonds and create worse payment terms for borrowing.
Depleting reserves despite recent funding
We know that at the end of Q3 2021, WeWork’s net cash position (removing accounts payable and adding accounts receivable) stood at an alarming $69m despite a total cash position of $460m. SoftBank remains one of the few investors willing to take further risk. In January this year, WeWork announced that they have issued another $250m in two-year bonds to SoftBank Vision Fund II-2 L.P. Most critics point to this as SoftBank acting on its sunk cost, but for the firm who has already written down their investment by $6.6b, this new bond purchase signifies some degree of confidence in WeWork nonetheless.
Running risk of liquidity problems
A report on Dec. 13 in The Wall Street Journal highlighted the company's liquidity problems and estimated that it was set to end 2022 with $300m in cash, which is less than a third of what they had. Presuming these numbers are accurate, we can infer that the cash position stands at approximately $550m after the Softbank injection at the start of the 2023. At its current pace of operating expenses, some back of envelope calculations would suggest that WeWork could realistically run the risk of default as soon as early next year if the bottom line does not improve.
Is management taking the right steps to salvage the company?
Cost cutting… again
The company is taking steps to secure more runway and announced plans in January this year to lay off 300 employees worldwide. The cuts are aimed at reducing costs and shoring up its cash reserves, as the company faces the risk of loan defaults. This represents approximately 7% of its estimated global workforce predominantly in the U.S. This is consistent with companies such as Google who laid off 6% of their workforce in January. The move, however, is a far cry from the current 13% (and counting) layoff happening at Meta or the 2020 Airbnb layoff which saw 25% of their workforce being cut. This move follows the closure of 40 underperforming locations in the U.S. announced in November last year, leaving the company at 700 global locations.
It is important to note that the company has already restructured and streamlined operations several times since its slew of troubles began in 2019 and the workforce of nearly 13,000 employees have now dwindled to approximately 4000 globally.
Insiders are buying in - a small sign of confidence?
A quick look at the purchasing activity of insiders also saw CEO & Chairman Sandeep Mathrani making personal stock purchases as recent as September 2022. This brings his shares owned to 2.38m at an average buy price of US$4.53. It’s likely that CEO Mathrani has shed a few tears over his entry timing, but it does show his confidence for WeWork to tide over this rough patch and a positive long-term outlook.
What is WeWork’s competitive advantage, really?
WeWork = Co-Working – A case of overwhelming mindshare
A look at Google search trends for the past 12 months paints a compelling picture of WeWork’s brand and mindshare dominance in coworking. Matched against its largest competing brand Regus (owned by IWG HoldingLON:IWG) with approximately 4x more global locations, WeWork consistently gains more than double the organic search traffic consistently.
Note: The blip up in the WeWork search traffic in March can be attributed to the launch of the AppleTV+ mini-series WeCrashed which starred A-list stars Jared Leto and Anne Hathaway. The TV series depicted the inner workings of the dramatic fall from grace of WeWork and was a significant hit with viewers.
This digression also serves as a very nice segue into a key point – “No publicity is bad publicity”. The high-profile failure of WeWork has catapulted the brand into to a household name which the media can’t seem to get enough of. Through its spectacular rise and fall, WeWork has captured almost the entire consumer mindshare for the co-working industry itself. When people think co-working, they think WeWork.
This mindshare coupled with a compelling product that users love would translate into customer acquisition and marketing cost savings for the company in the long run. In fact, we may already be seeing this play out. WeWork’s Selling, General & Administrative (SG&A) costs which consists of their marketing and selling expenses have been consistently declining in the past 4 quarters despite the growing revenue.
Is there light at the end of the tunnel?
COVID-19 and the subsequent reopening of the world has been a major co-working growth catalyst as the push for work-from-anywhere continues to rise as a global phenomenon. As of Q3 2022, WeWork’s physical occupancy already reclaimed pre-pandemic levels at 72% from a low of 45% in Q4 2020 and analysts believe that this will continue to rise over the next few years.
WeWork’s All Access Product which allows employees to access offices globally along with On-Demand consolidated memberships grew 110% year-over-year. The WeWork Access products generated $47m of revenue in the third quarter. Although this merely a fraction of the $943m it generated with its standard space-as-a-service business model in Q3 2022, sales from these flexible working products increased 135% year-over-year. However, with the global Tech layoffs happening at the same time, this growth engine could be significantly depressed. The dual impact of these factors could probably be validated with the release of their upcoming Q4 earnings.
The closure of the 40 underperforming North America Outlets signals clearly that North America sales are clearly unimpressive, but the company has been making a push in Europe with the latest opening of a branch in Paris to signalling stronger commitment for the region.
Concluding Thoughts
This year will be make-or-break for the company. An investment in WeWork is an extremely risky binary growth bet one of the world’s most recognisable brands in real estate. The company technically has the ability to continue to operate for the next year or so and has a real shot at achieving profitability to investors. Make no mistake, however, this is an extremely risky play both ways (long or short) and we do not recommend long-term investors seek to gamble on the stock. The considerable upside and compelling valuation should be balanced with the extremely real possibility of a complete write-off with bankruptcy on the cards. This is a definitely a story that is still developing as we look towards the earnings call coming in on the February 16th. Do let us know in our Telegram Community if you would like a more detailed look at and a fair valuation to be done in our deep dive series.
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