WeWork was on the verge of the corporate comeback story of the century.
Wild child CEO Adam Neumann was gone, losses were shrinking and experienced executives were taking the co-working firm public just two years after its disastrous IPO attempt.
For WeWork, the successful public offering was a triumph. “Yes, we’re not the $47 billion behemoth we once claimed to be, but we’re still worth billions! The business model is good! It was just our crazy founder!”
It was a fuck-you to legions of doubters.
But the joy didn’t last. Since WeWork’s SPAC offering late last year, its stock has come crashing down. It was trading at $2.65 a share Friday afternoon, down from a high of $13.02 a year ago.
To be sure, the broader market has had a terrible 2022. On Thursday, the Dow dropped 450 points. The S&P 500 sank to a new low for the year. Even Apple, a stalwart during down times, fell 5 percent. It’s a bloodbath everywhere you look.
But WeWork has not simply been caught in a wave of investor pessimism. The company has real problems.
It lost $635 million in the second quarter. It has $2.1 billion in short-term debt. And, despite Neumann’s initial claims to the contrary, WeWork is an office company. It operates in the real estate sector hit hardest by the pandemic.
A key issue for WeWork’s stock besides profitability is Beta — an indicator of the stock’s volatility compared to the stock market as a whole. A Beta of 1 means the stock fluctuates the same as the entire market does. WeWork’s Beta is 1.57. At the moment, that is bad for any company, but especially so for unprofitable ones, and even worse for SPAC companies like WeWork.
“It checks every box of what you would be scared of in this environment,” said Alex Snyder, an analyst at CenterSquare Investment Management, who follows WeWork.
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So the real question remains: Is WeWork heading into bag holder territory?
Maybe. But perhaps Ziploc, not Hefty, should be the bag of choice.
WeWork has been heading in the right direction under CEO Sandeep Mathrani. As of June, revenue was up 37 percent and losses down 31 percent from a year earlier. Occupancy had climbed back to pre-pandemic levels.
And the economy’s expected downturn could actually help the firm. More uncertainty could lead office users to ditch long-term contracts in favor of short-term leases, like the kind WeWork offers. The company is also positioning itself as a beneficiary of hybrid work.
But first WeWork must weather the storm. To do this, it needs cash.
WeWork had $625 million on hand as of June 30, down from $924 million at the end of 2021.
“I say they have got at least another year of rope,” said Snyder.
If not, the company will have to find more cash. Doing so by issuing shares is an unappetizing option with the stock trading under $3.
“They will not want to raise money at these prices and I know Sandeep is smart enough to avoid the dilution,” said Snyder.
If WeWork got to the point where it needed money, it would likely choose convertible debt, Synder said. The company could later convert that debt to equity if the stock price recovers.
Keep in mind, the company still has backing from SoftBank, which, despite its flops, plans to launch its third Vision Fund.
WeWork is in a gray area. No one knows what the future holds for office buildings. The only people who claim to are those who depend on them (paging Marc Holliday and Bruce Flatt).
But WeWork has made improvements under Mathrani. It cut leases and slashed overhead. Selling, general and administrative expenses in the second quarter decreased $38 million from the prior year to $189 million.
Unlike other SoftBank-backed companies, such as Compass, WeWork was not in the “grow at all costs, eat my competitors, spit them out and stomp on them” phase prior to the market downturn. It was not even in the “we are actually a tech company” phase. It was in the “let’s stay in our lane” phase.
What WeWork is good at is getting detached millennials and transient workers into a shared space. Now it just needs to hunker down during the shitshow in the markets and it could get through to the other side in decent shape.