WeWork – Still does not work.

WeWork is teetering on the edge.

• Once a SoftBank darling, WeWork is teetering on the edge of going bankrupt as it has still not fixed the fundamental issues with its business model that I identified before its first attempt at an IPO in 2019 (see here).
• Furthermore, the fact that its once distant rival, IWG is now much larger, is growing revenues and generating cash (see here) is a sign of just how fundamentally compromised WeWork’s business model remains.
• WeWork reported Q2 2023 results where revenue growth of 4% YoY to $844m met expectations but net income was far below.
• WeWork reported operating losses of $351m and burned $246m in cash from operations offering very little improvement over Q1 2023 despite a debt restructuring and the promise of better performance in Q2 2023.
• To add insult to injury, the company stated that as a result of its execrable performance “substantial doubt exists about the company’s ability to continue as a going concern”.
• The result was an 18% decline in the shares to $0.17 and I am reasonably confident that the real value of the equity is $0.
• The problem stems from the company’s founding when the idea was to build a network of co-working spaces to which users would be extremely loyal.
• This in turn would support pricing and cash generation supporting the now outlandish $47bn valuation at which the company first tried to go public.
• This meant that a land grab was required to get all of the prime locations and companies many of whom were moving to co-working spaces for the first time.
• In order to do this, WeWork was operating at negative gross margins, but it turned out that users were not loyal at all and that there was no substance to the much-hyped ecosystem that the company had created.
• From looking at the accounts that the company has published so far in 2023, not an enormous amount has changed, and the company has not managed to fully extricate itself from the economically unviable business model that it created.
• Consequently, I don’t think that WeWork is going to survive in its current form (although the brand probably still has some value) and I expect that the debt holders may well end up taking over the company.
• This will leave IWG as by far the biggest name in the co-working space but despite seeing growth in revenues and cash generation, the shares remain depressed.
• I suspect that this is due to the general view that corporate real estate is a dead end thanks to the weak economy and the workforce’s reluctance to return to the office full-time.
• Ironically it is just this trend that IWG is capitalising on as many companies have decided that they do not need such large offices and are moving into co-working spaces operated by IWG.
• This is how IWG is managing to outperform its rival, but I am far from certain how long it will last.
• One thing I am fairly sure of is that it will last longer than WeWork.