WeWork is a commercial real estate company on a cusp of an impressive turnaround, but should investors trust that it can lower its losses?
Nov. 4, 2021
An absolute heavyweight in the shared workspace segment, WeWork (NYSE: WE) finally went public last month. After enduring a management dispute, massive losses, and the COVID-19 pandemic in the previous two years, it listed on the secondary market via a reverse merger with a special purpose acquisition company BowX Acquisition Corp. But is WeWork stock a good investment right now?
The bull case for WeWork
The commercial real estate market was among the worst hit in 2020. As governments imposed lockdowns, several companies transitioned to a remote-first business model, significantly impacting the top-line of WeWork.
While WeWork's sales rose from $1.82 billion in 2018 to $3.45 billion in 2019, they fell to $3.4 billion in 2020 and $2.66 billion in the last four quarters.
But the company's revenue has now increased in the last five quarters on a sequential basis. It also indicates that WeWork's turnaround story should gain pace going forward as macro-economic conditions improve globally.
In the second quarter of 2021, the company's new desk sales stood at 98,000, and occupancy rates rose to 52% from 48% in the March quarter. After accounting for the 40,000 net memberships contracted to be onboarded by the end of this year, WeWork's occupancy rates improved to 57%.
To offset a high cash burn rate, WeWork exited 150 leases and amended more than 350 leases since the beginning of 2020. It allowed the company to achieve rent savings of $400 million and lower selling, general, and administrative expenses by $1 billion on an annual run-rate basis.
The bear case for WeWork
WeWork reported a net loss of close to $3 billion in the last two quarters despite the cost savings. It ended Q2 with a cash balance of $1.6 billion and raised another $1.3 billion in the SPAC merger. But this is still lower compared to its cash balance of $4.1 billion at the end of Q2 of 2020.
In its preliminary Q3 results, WeWork reported revenue of $658 million which was 10% higher on a sequential basis, while its occupancy rate rose to 80%. These growth rates are not too encouraging, given that the pandemic still weighs heavily on several businesses.
Another reason for concern is the shift towards remote work, a trend that is likely to gain momentum in the upcoming decade and might be a major headwind for WeWork over the long term.
So, should I buy WeWork stock?
WeWork is valued at a market cap of $7.7 billion and has lost 30% in market value since it listed on the NASDAQ. While it does not own real estate inventory, the company continues to post billion-dollar losses. It may require to keep raising capital which will either dilute shareholder wealth or increase the company's debt balance.
WeWork stock may gain pace quickly, especially if it can narrow losses at an accelerated pace. But it makes sense to deploy a wait-and-watch strategy for at least a couple more quarters before adding the stock to your portfolio.
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Quickfire Round
What is WeWork's market cap?
At the time of writing, WeWork is valued at $7.7 billion
Does WeWork pay a dividend?
No, WeWork does not pay a dividend to investors
When did WeWork go public?
WeWork began trading on October 22, 2021
