On October 21, global flexible workspace provider WeWork (NYSE: WE) went public in a SPAC (special purpose acquisition company) merger with BowX Acquisition Corp (NASDAQ: BOWX). The combined company will now operate as WeWork Inc. and begin trading on the NYSE under the ticker symbol “WE”.
WeWork stock rose 13.5% on its first day of trading to close at $11.78, valuing the company at a market cap of $9.33 billion.
An overview of WeWork
Founded in 2010, WeWork was created with a vision to provide an environment where people and companies can come together and do their best work. The company opened its first location in New York City and has since grown to one of the largest flexible workspace providers in the world.
As of September 2021, WeWork’s network encompassed over 700 locations in 50 cities and 38 countries, will close to 500,000 memberships. WeWork raised gross proceeds of $1.3 billion in the SPAC merger. The company first aimed to go public back in 2019 at a valuation of $47 billion but the plan was shelved due to corporate governance concerns and a string of other issues.
Soon after the failed IPO attempt, WeWork’s high-profile co-founder, Adam Neumann, was asked to resign from the post of CEO by the end of 2019. Since then, WeWork appointed Sandeep Mathrani at the helm, a real estate veteran who previously led Brookfield Properties Retail.
WeWork explained that since the start of 2020, it exited 150 leases and amended another 350 leases achieving rent savings of $400 million to date. It also lowered selling, general and administrative expenses by $1 billion on an annual run-rate basis.
Despite these cost savings, WeWork reported a net loss of almost $3 billion in the first six months of 2021.
Recent quarterly results for WeWork
In the second quarter of 2021, WeWork reported sales of $593 million and forecast sales between $650 million and $700 million in Q3. In the second quarter of 2020, its sales stood at $882 million. Its free cash flow stood at a negative $649 million compared to negative $671 million in the year-ago period. The company ended the quarter with $1.6 billion in cash, significantly lower than the prior-year figure of $4.1 billion.
WeWork’s consolidated new desk sales totaled 98,000 in Q2 which equates to 5.9 million of square feet sold. Its total occupancy rose to 52% compared to 48% in Q1 of 2021. If we include the incremental 40,000 net memberships that are contracted to move in by the end of 2021, the occupancy rate improves to 57%.
WeWork also announced a strategic partnership with real estate giant Cushman & Wakefield which should cheer long-term investors.
What next for WE stock?
In Q3 of 2021, WeWork’s preliminary total revenue rose to $658 million, a sequential gain of 10%. The total occupancy rate improved to 60% at the end of Q3 as consolidated gross desk sales stood at 154,000 representing 9.2 million square feet sold.
According to WeWork’s investor presentation, it has forecast 2021 sales at $2.65 billion, and its top-line is forecast to touch $6.78 billion by the end of 2024. Comparatively, its adjusted EBITDA is forecast to rise to $2 billion in 2024 compared to a loss of $1.55 billion in 2021.
Commercial real estate was among the hardest-hit sectors amid COVID-19 which resulted in a revenue decline for WeWork and massive losses. However, its revenue has now increased in the last five consecutive quarters which suggests the company is on the cusp of an impressive turnaround.
WeWork explained it is realizing new revenue opportunities by digitizing its current offerings. At the end of Q3, its all-access subscription-based product and other virtual memberships have reached 32,000. It is also building a proprietary workplace management platform where landlords and members can manage flex space across portfolios.
At a forward price to 2021 sales multiple of less than 4x, WE stock is trading at a reasonable valuation and can be the ultimate post-COVID-19 bet. But the company also needs to limit its cash burn in the future, allowing it to expand without having to raise capital which will result in shareholder dilution.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
