- WeWork is finally going public after its failed 2019 IPO.
- The pandemic has created an unexpected tailwind with enterprise clients for the flexible workspace company.
- With revenues expected to rise significantly in the years ahead, WeWork looks to finally realize a profit.
WeWork’s (BOWX) woes as a private highly valued SoftBank-funded company are well documented, mostly centring around ex-CEO and cofounder Adam Neumann's excesses. What came after the fall of a company that was previously one of the USA's most highly valued and well-known startups was divestments of non-core businesses, a brutal cost-cutting, and a strategic pivot. Neumann was out, and Sandeep Mathrani was in. And the new leader, previously the CEO of Brookfield Property Partners, now faced the Sisyphean task of turning around a failing company with a historically uneconomical business model.
Then the pandemic hit.
So WeWork found its business yet again unraveling as rolling quarantines and stay-at-home orders kept people shut indoors, largely out of sight of the urban centres that had since WeWork's founding in 2010 graced beautifully designed co-working spaces. The move to become a public company via a merger with special purpose acquisition company BowX Acquisition Corp, could not come sooner.
With the pandemic largely contained through the ongoing vaccination campaign, WeWork needs to seize the opportunities that will arise from the new age of working. This is built on hybrid working models where larger companies increasingly use flexible workplace solutions for their workforce.
The Pandemic And The Future Of Work
WeWork has shifted its focus to enterprise clients which now form 50% of the total memberships of its 850 locations. These are spread across 150 cities in every continent in the world.
The move to enterprise clients comes with the benefits of longer-term leases which would make revenues more stable and predictable on the back of the underlying cost to WeWork for its brick-and-mortar locations.
The average commitment length has increased to 15 months in 2020 from just 1 month in 2015. The benefits for its enterprise tenants with case studies in Seattle and Amsterdam confirming a 24% and 27% cost saving respectively versus traditional office leases. With the pandemic uprooting conventional approach to offices, WeWork's cheaper flexible office spaces place it a positive future path to capitalize on the large global office property market.
The company is targeting 1 million in consolidated total memberships in fiscal 2024 for revenue of $7 billion and adjusted EBITDA of $2 billion. This excludes figures from its ChinaCo, which WeWork sold its majority stake for $200 million in 2020.
The company expects revenue for fiscal 2021 to stay flat year-over-year at $3.2 billion with a negative adjusted EBITDA of $900 million realized in the same year, a significant improvement on fiscal 2020 negative adjusted EBITDA of $1.8 billion.
WeWork expects to reach positive adjusted EBITDA for the first time in the fourth quarter of the current fiscal year with an adjusted EBITDA profit of $8 million. This is as its cost-cutting efforts, a renewed focus on enterprise clients and rising demand for flexible workspaces post-pandemic all work together to improve its financial standing.
The company has guided for continued positive adjusted EBITDA in the years ahead with $485 million expected to be realized in fiscal 2022 and $1.36 billion in fiscal 2023. Hence, with an $8 billion market cap once the merger closes, WeWork currently trades on a price to 2021 sales multiple of 2.5x. The company does hold total debt of around $3 billion but expects to raise $1.8 billion in cash from its go-public merger. This opens up a key risk that the company will likely be dependent on equity raises in the future if redemptions by BowX shareholders are as high as that of other recently closed deSPACs.
SoftBank’s $47 Billion Valuation In The Post Covid Era
I expect WeWork's shares to decline somewhat steeply post-merger close, not just because this would mirror other recently closed deSPACs, but because the company's financials, though improving, are still somewhat suspended in a state of discombobulation. Expected positive adjusted EBITDA might not materialize and the company could find its cash balance lower than expected. The high debt also means significant interest expenses in the years ahead unless WeWork is able to translate future demand for flexible workspaces into strong and consistent free cash flows.
As a private Softbank-funded company WeWork reached a peak valuation of $47 billion. While future shareholders in the soon to be public WeWork will hope the company will once again reach this, it will likely take some time and a lot more hard work by management to get to and retain profitability. I won't buy shares now, but will probably do so once the merger is complete and the valuation likely settled somewhat lower from its current $10 base. WeWork has a strong brand name that looks set to ride to coattails of the flexible working revolution.
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