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Stock Spotlight: Has the shine has come off the WeWork brand?

On 21 October 2021, WeWork went public via a special-purpose acquisition merger with acquiring firm BowX for an estimated value of $9bn and issued its first results as a public company on 15 November, which showed further losses, but an improvement on the previous quarter.

This markedly lower market value demonstrates “the extent to which the shine has come off the WeWork brand”, according to Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, who added investors have suffered a “crisis of confidence” in the firm since 2019.

“Although it initially attempted to position itself as a tech emperor, its clothes fell away to reveal underneath it was fundamentally a real estate company leasing shared workspaces to short-term tenants,” she said.

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The relatively fanfare-free debut is a notable departure from the firm’s first attempt at an IPO, which valued the company at $47bn. It was called “the most ridiculous IPO of 2019” by Forbes, and T. Rowe Price described its own investment in the firm as “terrible”.

It ultimately took just over a month from filing the paperwork to pulling the launch, with SoftBank taking control of the firm on 22 October.

Co-founder and CEO Adam Neumann, who has since admitted the valuation “went to [his] head”, was ousted from the firm, but the blow was likely softened by the $1.7bn golden umbrella that was paid out to him, before WeWork laid off 2,400 employees on 21 November.

The company’s announcement that it would be attempting a second IPO via the SPAC model was described by Jeffrey Halley, senior market analyst for Asia Pacific at OANDA, as “peak SPAC”, adding that WeWork was “the serviced office company with ping pong tables that all those clever finance people thought was worth $50bn less than two years ago”.

The US Securities and Exchange Commission has an open investigation into SPAC IPOs.

‘Better than expected’

WeWork’s Q3 results this year, which revealed an adjusted EBITDA loss of $356m, was
an improvement on the Q2 losses of $449m, but investors remain cautious.

Adam Vettese, analyst at eToro, said the results showed “signs of improvement” and highlighted that revenue had also improved.

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“That loss is $93m less than it was in the previous quarter, revenue has jumped quarter-on-quarter to $661m and the office start-up has improved its occupancy rate from 50% to 56% in three months,” he explained.

Peter Hobson, senior analyst at Third Bridge, also questioned “if and when WeWork can achieve profitability” but added the company “performs better than you might expect” on an individual building level.

“Their buildings normally break even with an occupancy level of around 60%,” he said.”Our experts expect occupancy to rise to around 70% over the next two-to- four years as more people come back into big cities and companies that have previously taken traditional space find the WeWork model more appealing.”

Post-Covid world

However, coronavirus and lockdowns have permanently altered the relationship of companies with office space, and this remains a big question mark for the firm.

“The pandemic swung a wrecking ball through its business model as lockdowns led a shift to homeworking and as a result it has slimmed down drastically, closing locations, slashing jobs and renegotiating its long-term leases with landlords,” Streeter reasoned.

“Recovery is underway at the company, as more workers head back to the office and companies embrace flexibility but it is still making very slow progress towards profit.

“There will continue to be worries that in another downturn its clients may still scale back on space requirements faster than it can back out of its long-term
lease obligations.”

Hobson also pointed to the uncertain future for a company that relies on people heading into the office in a hybrid working model.

“While we have more clarity now than we did at the start of 2021, the full picture of what normalised post-pandemic office demand looks like remains elusive,” he said.

“There is also increasing competition for WeWork in the co-working and flexible workspace category as landlords with excess inventory start rolling out similar offerings.”

Vettese argued all these factors leave “very little on the horizon” to suggest that WeWork will ever return to its $47bn valuation, “unless working conditions change as dramatically as they did at the start of the pandemic”.

Streeter added: “While the future of work still remains so uncertain, WeWork’s prospects are also unclear.”

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