After a much-anticipated and massively disappointing almost-IPO in 2019, investors have been watching with a mix of curiosity and anticipation as WeWork attempts to launch itself (NYSE: WE) into publicly traded space. The 2019 near-miss (or should that be near-hit?) IPO, after it had been valued at $47 billion earlier the same year, was a crushing blow to fans of WeWork, as well as one of its then-biggest investors, SoftBank, which held a 29% stake in the company.
Ultimately, too many questions about corporate governance, alleged dodgy behavior by its then-CEO Adam Neumann, and its actual value caused the IPO to be cancelled. Since then, SoftBank has been working to make its many sizable investments in WeWork return a positive -- or at the very least, reach a break-even point.
WeWork’s changing landscape
Since that 2019 failed IPO, WeWork has made a lot of changes to pretty much everything about how the company works. They kept the desk-leasing aspect, obviously. But installing Sandeep Mathrani as the new CEO in 2020 started the ball rolling on a variety of modifications that would finally make WeWork less of a money pit.
For example, under Mathrani’s leadership, WeWork has been cutting costs ruthlessly, including renegotiating leases with building owners to reduce long-term indebtedness, and even managing to modify some of those leases into something more like a property management role. However, despite all efforts to right the boat, the pandemic hit WeWork like a sledgehammer. It disclosed $3.2 billion in losses in 2020. Fortunately, those cost-cutting efforts mentioned above managed to free up $1.6 billion in cash flow. So, what’s 2021 got in store? A project loss of just $1.5 billion…
In all fairness, due to the pandemic, occupancy dropped from 75% in 2019 to just 45% in 2020. It’s back up to about 60% today, and about 50% of that is thanks to enterprise customers leasing large blocks of space for their hybrid workers. Courting enterprise clients has given WeWork a more solid base to start from, as well as much-longer-term leases that have pushed the average commitment length up to 15 months.
WeWork with SPACs
The merger with SPAC BowX (NASDAQ: BOWX) has also not cost anyone any tears. WeWork and BowX announced the official closure of their deal on October 20, 2021. In the press release, BowX disclosed that it raised approximately $1.3 billion, prior to expenses, for WeWork, as well as security in the form of an equity backstop from Cushman & Wakefield.
Despite the seemingly miraculous turnaround, WeWork’s 2019 valuation of $47 billion has become a $9.2 billion IPO. Oh, how the mighty have fallen (in value). How the IPO will be received is anybody’s guess, especially considering that WeWork is essentially still losing money, regardless of projections that anticipate a turnaround. SoftBank really needs this one to catch fire; it’s already dumped so much money into WeWork that there’s no turning back now.
The Millionacres bottom line
As I stated above, SoftBank needs WeWork’s IPO to come out of the gates hot, but that doesn’t mean that it should. As our own Matthew Frankel said on Fool Live back in April, "They have a lot to prove in terms of their path to profitability. I don't care if they have $1.6 billion in the bank if they're losing billions of dollars every year."
This. This is all there is to it.
WeWork is trying to work, but it still doesn’t quite… work. It might, if SoftBank wants to throw another $10 billion dollars at it, who knows? And maybe I’ll be eating my words in a year when it’s the next hot stock. But the truth is that right now, office space is just not a great investment, and WeWork has never had the best business model, even in times that weren’t so challenging for this space.
Mathrani has made a lot of significant changes to the machinery behind WeWork, and it’s going to take time to see if those changes will bear fruit. Projections are one thing, but a lot of these modifications are absolutely experiments to try to find something that’s going to work longer term.
I wish him well, but I absolutely cannot recommend investors get in on this IPO. Still, I sincerely hope they prove me wrong and make chumps of us all.