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

In its latest quarterly earnings, the company achieved 73% occupancy, but still reported negative adj. EBITDA. Factoring in depreciation and interest expenses, WeWork lost $299 million in the quarter.

With less than $1 billion in cash and liquidity vs. ~$300 million quarterly cash burn, time appears to be running out for WeWork. I recommend investors avoid this stock.

Company Overview

WeWork is a company providing shared workspaces for entrepreneurs, start-ups, freelancers, and small businesses. WeWork’s core business model is offering flexible office space solutions in prime locations around the world with built-in amenities like high-speed internet, meeting rooms, kitchens and other office services.

Systemwide, WeWork has 779 locations globally with over 900k workstation capacity (Figure 1).

WeWork’s business model revolves around the basic idea of leasing large amounts of prime office space long-term and subleasing it short-term to small clients. Clients can choose office solutions to suit their individual needs; from space-as-a-service or a dedicated desk to a dedicated floor or a full office building all managed by WeWork (Figure 2).

For clients, leasing through WeWork may lead to large potential savings as WeWork has economies of scale to deliver many of these office operations at lower cost than the client (Figure 3).

Meteoric Rise And Fall

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

WeWork became a darling of venture capital investors as they were attracted by the company’s rapid growth potential and the promise of “disrupting” traditional real estate markets. Venture capitalists were also enthralled by WeWork’s charismatic founder, Adam Neumann, who was often portrayed as a visionary leader who is “transforming” the way people work and live (In fact, Apple TV even created a series based on WeWork and Mr. Neumann with Jared Leto playing Mr. Neumann).

However, Mr. Neumann’s leadership style was also criticized for being erratic and unpredictable, and his management practices were questioned in the lead up to the company’s 2019 planned IPO.

In August 2019, WeWork filed its paperwork for an IPO, revealing that the company had lost $900 million on revenues of $1.5 billion in the six months to June 30, 2019. The S1 filing also revealed that the company had raised over $12 billion in funding from investors (valuing the company at $47 billion), but was burning through cash at an incredible rate of $150-200 million per month.

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

In the weeks following the S1 filing, WeWork’s proposed valuation dropped significantly, as investors were reluctant to pay up for the money losing enterprise. Ultimately, the IPO was postponed and Adam Neumann was forced to step down as WeWork’s CEO (don’t cry for him though, as he reportedly got a $1.7 billion golden parachute).

COVID Was A Big Hit To Operations

Unfortunately for WeWork, the company missed the golden window to IPO the company prior to the COVID pandemic. Membership fell from 580k in Q3/2019 (Figure 4) immediately prior to the pandemic to 450k at the end of 2020 (Figure 5), as many workers chose to work from home (“WFH”) during the pandemic.

At the same time, WeWork continued to expand, as many office leases were agreed to prior to the pandemic and WeWork had no choice but to continue with building them out to spec. WeWork expanded its network to over 850 locations and 1 million workstations by the end of 2020 while its membership slumped by over 20%.

However, due to lower cost of operations during the pandemic (as less people were in the office), financial results were actually better in 2020 compare to 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 (Figure 6).

But -55% adjusted EBITDA margin is still an atrocious figure, however one slices and dices it.

Backdoor IPO Through BowX SPAC

In 2021, WeWork finally came to the public markets via a reverse merger with the BowX SPAC managed by Vivek Ranadive. However, with poor operating results in 2020, WeWork’s valuation fell to only $9 billion vs. $47 billion prior to its failed 2019 IPO.

During the SPAC process, the company believed it could achieve adj. EBITDA breakeven by Q4/2021 with 70% occupancy and would achieve 23% adj. EBITDA margins by 2023 (Figure 7).

WeWork Has Performed Horribly Since De-SPAC

With the benefit of hindsight, let see how WeWork has performed since it came public via the BowX SPAC.

Operationally, WeWork’s occupancy failed to achieve its Q4/2021 estimate of 70% that the company touted as the adj. EBITDA breakeven rate from figure 7 above. Instead, Q4/2021 occupancy was only 63%. Furthermore, despite continued recovery in businesses returning to the office, WeWork’s occupancy levels only reached 73% in the latest Q1/23 report, and actually fell 2% QoQ (Figure 8).

Financially, even in the latest quarter with 73% occupancy, WeWork continued to deliver negative adj. EBITDA (Figure 9). So not only was WeWork late in delivering the promised occupancy levels, even at occupancy levels surpassing the company’s SPAC projections, WeWork continues to deliver adj. EBITDA losses.

Furthermore, since WeWork is in the business of leasing offices to companies, depreciation (office fixtures will need to be maintained and replaced, so depreciation is an estimate of replacement cost!) and interest (leases need to be financed) are real costs of doing business. Including these expenses, WeWork continued to report large losses, with a Q1/23 net loss of $299 million or $0.34 / share (Figure 10).

SoftBank Try To Stave Off Bankruptcy With Debt Restructuring

In March 2023, WeWork restructured its crushing debt load by asking a group of its bondholders, led by SoftBank, to restructure its debts and inject more liquidity.

Altogether, the restructuring reduced net debt by $1.5 billion and extended debt maturities from 2025 to 2027. The transactions also provided $540 million in new funding, $175 million in new capital commitments, and $300 million in rolled capital commitments to WeWork. The transactions were aimed at reducing the company’s debt burden and improve its liquidity profile.

Time Is Running Out

Unfortunately the debt restructuring may not be enough, as I believe time seems to be running out for the company. As of March 31, 2023, WeWork only has $897 million in cash and liquidity (Figure 11) while burning through $284 million in operating cash flow in the first quarter (Figure 12). The cash and liquidity may only last ~3 quarters before WeWork faces another cash crunch, at the current cash burn rate.

Conclusion

WeWork recently reported its first quarter results, delivering yet another poor financial quarter. Compared to the rosy projections from the SPAC merger, WeWork has yet to achieve adj. EBITDA breakeven, let alone actual earnings.

Unfortunately, with less than $1 billion in cash and liquidity and a quarterly burn rate of ~$300 million, I believe that time seems to be running out for WeWork. I recommend investors avoid this stock.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.