WeWork Inc. (NYSE:WE) was once a venture capital darling with a private market valuation of $47 billion. However, the company’s business model, in my opinion, just does not work.

The company reached 73% occupancy in its most recent quarterly earnings, yet nevertheless reported negative adj. EBITDA. WeWork lost $299 million in the third quarter after depreciation and interest expenses.

WeWork appears to be running out of time, with less than $1 billion in cash and liquidity vs a $300 million quarterly cash burn. I advise investors to avoid this stock.

Overview of the Business

WeWork is a startup that provides entrepreneurs, start-ups, freelancers, and small enterprises with shared workspaces. The fundamental business strategy of WeWork is to provide flexible office space solutions in prominent locations throughout the world, with built-in amenities such as high-speed internet, meeting rooms, kitchens, and other office services.

WeWork has 779 locations worldwide with over 900,000 workstations

WeWork’s business model is based on leasing significant amounts of prime office space long-term and subleasing it to small clients on a short-term basis. Clients can tailor workplace solutions to their specific requirements, ranging from space-as-a-service or a dedicated desk to a dedicated floor or a full office complex, all of which are managed by WeWork.

Leasing through WeWork may result in significant potential savings for clients because WeWork has economies of scale to execute many of these office functions at a cheaper cost than the client.

Meteorological Rise and Fall

WeWork was launched in 2010 as a co-working space in New York City and swiftly rose to a private market valuation of over $1 billion by 2014, making it one of the world’s fastest-growing “unicorns.”

WeWork attracted venture capital investors due to the company’s high growth potential and the promise of “disrupting” existing real estate markets. WeWork’s charismatic creator, Adam Neumann, was also enthralling venture capitalists, who were frequently depicted as a visionary leader who is “transforming” the way people work and live (In fact, Apple TV created a series based on WeWork and Mr. Neumann, with Jared Leto as Mr. Neumann).

However, Mr. Neumann’s leadership style has been attacked for being erratic and unpredictable, and his management practices have been called into question in the run-up to the company’s anticipated IPO in 2019.

WeWork filed for an IPO in August 2019, saying that the company had lost $900 million on $1.5 billion in revenue in the six months ending June 30, 2019. According to the S1 filing, the company had raised over $12 billion in capital from investors (valuing the company at $47 billion), but was burning through cash at an astonishing pace of $150-200 million per month.

Several alleged management practices that raised concerns among public investors, including Adam Neumann personally acquiring commercial buildings and then leasing them to WeWork, and Mr. Neumann registering the trademark “We” prior to the company’s rebranding efforts and selling the trademark to WeWork for $5.9 million.

WeWork’s projected valuation fell dramatically in the weeks following the S1 filing, as investors were hesitant to pay up for the money-losing company. The IPO was eventually postponed, and Adam Neumann was forced to resign as WeWork’s CEO (don’t cry for him, he reportedly received a $1.7 billion golden parachute).

COVID Had a Significant Impact on Operations

Unfortunately for WeWork, the company lost the great opportunity to go public before the COVID outbreak. As many workers preferred to work from home (WFH) during the pandemic, membership declined from 580k in Q3/2019 shortly prior to the epidemic to 450k towards the end of 2020.

At the same time, WeWork continued to grow because many office contracts had been signed before the epidemic, and WeWork had little alternative but to continue building them out to specification. WeWork plans to extend its network to over 850 sites and 1 million workstations by the end of 2020, despite a 20% drop in membership.

However, due to lower operating costs during the pandemic (due to fewer people in the office), financial results in 2020 were actually better than in 2021, with WeWork delivering flat revenues of $3.2 billion but a smaller adjusted EBITDA loss of -$1.75 billion vs. -$1.94 billion in 2019.

However, no matter how you slice it, a -55% adjusted EBITDA margin is still an appalling figure.

Backdoor IPO via BowX SPAC

WeWork entered the public markets in 2021 through a reverse merger with the BowX SPAC headed by Vivek Ranadive. However, due to poor financial results in 2020, WeWork’s valuation has dropped to $9 billion, compared to $47 billion before its unsuccessful 2019 IPO.

During the SPAC process, the company estimated that it could achieve adj. EBITDA breakeven with 70% occupancy by Q4/2021 and 23% adj. EBITDA margins by 2023.

WeWork’s Performance Has Been Horrible Since De-SPAC

With the benefit of hindsight, let’s look at how WeWork has done since going public through the BowX SPAC.

WeWork’s occupancy failed to meet its Q4/2021 expectation of 70%, which the firm cited as the adj. EBITDA breakeven rate is in Figure 7 above. Instead, occupancy in Q4/2021 was only 63%. Furthermore, despite the sustained recovery in businesses returning to the office, WeWork’s occupancy levels in the latest Q1/23 report only reached 73%, a 2% decrease year on year.

Even with 73% occupancy in the most recent quarter, WeWork continued to post negative adj. EBITDA. So, not only was WeWork late in reaching anticipated occupancy levels, but even when occupancy levels exceeded the company’s SPAC predictions, WeWork continued to post adj. EBITDA losses.

Furthermore, because WeWork leases offices to businesses, depreciation (office equipment must be maintained and replaced, therefore depreciation is an estimate of replacement cost!) and interest (lease payments must be financed) are genuine costs of doing business. WeWork continued to post substantial losses, with a Q1/23 net loss of $299 million, or $0.34 per share.

SoftBank Attempts to Avoid Bankruptcy Through Debt Restructuring

WeWork reduced its heavy debt load in March 2023 by requesting a group of bondholders led by SoftBank to restructure its loans and infuse more money.

Overall, the restructuring saved $1.5 billion in net debt and extended debt maturities from 2025 to 2027. WeWork received $540 million in fresh finance, $175 million in new capital commitments, and $300 million in rolled capital obligations as a result of the deals. The deals were designed to reduce the company’s debt and strengthen its liquidity profile.

The Clock Is Ticking

Unfortunately, the debt restructuring may not be enough, since I believe the company’s time is running short. WeWork has only $897 million in cash and liquidity as of March 31, 2023, while burning through $284 million in operating cash flow in the first quarter. At the present cash burn rate, the cash and liquidity may only last three quarters before WeWork faces another cash crunch.

Conclusion

WeWork just released its first-quarter earnings, revealing yet another disappointing financial quarter. WeWork has yet to achieve adj. EBITDA breakeven, let alone actual earnings, despite the optimistic expectations from the SPAC transaction.

Unfortunately, with less than a billion dollars in capital and liquidity and a quarterly burn rate of $300 million, I feel WeWork’s time is running out. I advise investors to avoid this stock.

Featured Image: Unsplash @ Austin Distel

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