IPO WeWork Is Worth a Look

The company new to the public markets looks a bit different than the one that pulled its IPO in 2019. We compare WeWork (WE) then and now, talk about leadership changes, the potential for the new WeWork, and the company's more realistic valuation.

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This video was recorded on Oct. 20, 2021.

Dylan Lewis: It's Wednesday, October 20th, and we're talking about WeWork. I'm the host, Dylan Lewis. I'm joined by fool.com's wicked worldly Wizard of OneKey writing, Brian Feroldi. Brian, how is it going?

Brian Feroldi: Dylan, it's good to be back on a Wednesday Show, which means we get a double dose of each other this week, making up for all the missed time in October.

Dylan Lewis: That's right. It's a double-dose and it's a good Wildcard Wednesday because I think this company we're going to be talking about, WeWork, it needs a little introduction. It is one of those companies that has been tough to put into a single category. I think Wildcard Wednesday is the most appropriate day for this episode.

Brian Feroldi: Totally. Is this a company that's in the real estate business? Is it a technology company that's focused on real estate? Who knows? Great show for a Wildcard Wednesday.

Dylan Lewis: Yes. I think this is a business that probably does not need as much background as maybe some of the other companies that we talk about. It has been in the news in a big way for the last four years. But in particular, the last 2.5, famously tried to come public in 2019. There were a lot of concerns about the company financials, about the valuation, about the leadership and the corporate governance. Those are pretty well-documented and we've done some shows on them in the past. But we're talking about it today because we're able to do the show, Brian, because of news yesterday. WeWork was going to be coming public via a SPAC, and yesterday, we got the news that was approved by the voters of the company bringing it public.

Brian Feroldi: Yes. The company tried to go the traditional IPO route two years ago. When that failed, it said, hey, it's 2021. How else can become public? A SPAC. In this case, if you want to become a shareholder of WeWork today, you can buy the SPAC. That ticker symbol is B-O-W-X. As you just pointed out, the odds of this deal going through are much higher today than they were yesterday.

Dylan Lewis: Yeah, and if I'm not mistaken, shares of WE are going to begin trading this week on the exchanges under the ticker WE. Until that happens, you can get access via B-O-W-X, the BOWX (BOWX) Acquisition Corp. Brian, I think we're going to try to resist the temptation as much as possible to revisit all of the drama of the 2019 IPO process and a lot of the dirty laundry that came out with the company during the press cycle. But I do want to approach this in the way that we would a history lesson, but also a new IPO show, or a new framework show that we would traditionally for prospectuses. I think we'll try to compare where the company was when it first came, or almost came to the public markets, and where it is now, as we discuss this business. I think maybe one of the first places to start is just the leaders of the SPAC and also the backstory on why and how this company is coming public now.

Brian Feroldi: Sure. That's one thing that did jump out to me. This company was not on my radar at all until you pointed it out to me. I mean, I just wrote this off as essentially the next Theranos, a company that tried to come public. That business clearly didn't work, so I was surprised to see it back. It was equally surprising to see when you look at the CEO of the SPAC that's taking this company public. This is Vivek Ranadive. That is a name that I have known and appreciated for many years. That name sounds familiar. He was the founder and CEO of a software company that was focused on Middleware called TIBCO. The reason that name might be even more familiar is, he was featured in Malcolm Gladwell's best-selling book, David and Goliath, because of the success that his daughter's basketball team had. It was largely due to the principles that Vivek put into place. He is an outside of the box thinker and is also an owner of the Sacramento Kings. To me, having his name associated with this deal boost its credibility.

Dylan Lewis: It does. I think the general theme we're going to be seeing as we work through this and compare and contrast where the company was in 2018 and 2021 now is, this is more buttoned up operation. Perhaps the adults are in the room, so to speak, with this business. You're going to see it both in the focus on the side of the SPAC and also the leadership team that's currently in place at WeWork. We'll talk about that a little bit. But I think Brian, materially, this is a very similar business to what was trying to become public in 2019. We had a couple different segments with that business in 2019 that are not currently there. They had WeWork, their core co-working business, WeLive, which is a co-living space, and WeGrow, which is a small-scale education initiative that they had. All of the money was really coming from the co-working. The business model there, Brian, is, we have these long-term leases. We're going to cut them up and find smaller tenants, be able to enjoy some premium on that, and then basically have short-term leases with them. That's how they made most of their money back in 2019. That's really how they're making most of their money now.

Brian Feroldi: Yeah, what's interesting about the new WeWork as we're going to call it. Is that a company did say it, Ranadive said, "We have divested those former of businesses, so they're no longer focus of the company at all. WeWork is the dominant focus of the company." That makes sense. If you just backup, but just think about the long-term potential for what the company is doing, there's still a lot of potential there. I mean, it fits very well with where the world was in 2019, and I think even more so today with where we are in a post COVID world. The idea is to offer anyone that wants flexible office space the ability to lease out on short-term or long-term arrangements. There's a lot of benefits to doing so. Especially if you're a small mom and pop shop, you can use offices on a temporary basis. Or even if you're a big employer, the ability to have flexible workspace is really attractive, especially if you have one-off business meetings and you want to prevent a professional look, or if you have an event coming up and need a bigger space. That was the long-term bull case for WeWork and it's very much still there.

Dylan Lewis: The stereotype is that the WeWork occupant is a freelancer or it's a start-up with four employees and it wouldn't make sense for them to have a traditional office, but the co-working space makes much more sense. I think that's true to some extent, but we are seeing increasingly that the names on their customer list are some pretty big companies.

Brian Feroldi: Absolutely. There are Microsoft, Samsung, Sprint, Square, IBM. Big companies have taken notice of this and they have really warmed up to the idea of flexible space. Keep in mind that was also in place two years ago. Given where we are in the world now with people returning back to work and employers are really struggling to figure out how much office space do we actually need to provide our employees with. This model makes even more sense today.

Dylan Lewis: I think that's right. It might an underappreciated piece of the narrative. We'll go through the financials and evaluation and talk a little bit about how we put a bow on it. But one thing I am struck by, is the fact that this company was able to navigate the last two years. Is now possibly at an even more advantageous position than they were when they were trying to come public in terms of just the real estate environment where people are with commercial leasing. There is a lot of interesting stuff here. I don't know if it's necessarily an investable idea, but I think it's an idea of worth paying attention to and following.

Brian Feroldi: Yes, I agree with you there. One thing that's worth pointing out is, while they did abandon their previous attempts at WeLive and WeGrow, the business model still has some innovation to it. One thing that WeWork is starting to do is to partner with property owners or businesses that have extra space, that they're not fully utilizing. To basically have WeWork handle out the leasing, and to get on WeWork's network so that you can actually monetize that space. That's an interesting innovation that I think could have long-term legs. Another thing that this company said that it's investing in is a SaaS product. An initiative that they have in place is to give these big employers the ability to not only manage all of their WeWork properties, but all of their non WeWork properties too. They can handle things like booking, access management, visitor management, flexible space analytics. Those two things I just mentioned are tiny or non-existing parts of the business today, but the company does still have some embedded optionality.

Dylan Lewis: Brian, I want to talk a little bit about management and culture early on in this episode. Because such a large part of the WeWork story when it was first trying to come public was Adam Neumann. This is the visionary founder and leader of the company, eccentric, checks a lot of the boxes for a classic Silicon Valley leader. Big ambitious ideas, big ambitious goals. When they were trying to shop the company to public investors in 2019, it was a pretty classic founder situation. We had a founder and the co-founder, Miguel McKelvey, was with the company as well, two co-founders. Really, the power sat with the co-founders, specifically Adam Neumann in this situation. The bet on We was a bet on him. He was the one steering the ship for better or worse. As the dirty laundry started getting aired, he quickly became a little bit of a sideshow and wound up being more of a distraction for the company. We saw them move on and bring in some more established leadership. That's what we see here with the current leadership team. It's a little bit more of the standard operators and people that have the resume of running big operations specifically in the real estate space.

Brian Feroldi: I think the company's Board of Directors recognized that they weren't going to go anywhere with Neumann, so he was shown the door and a new CEO was brought in. The current CEO is Sandeep Mathrani. He's only been at the company for two years, but he is an accomplished executive. The company's CFO is Ben Dunham. He's been at the company for four years. I think the management change out was needed and it does give this company some credibility now.

Dylan Lewis: Yes. Marcelo Claure, the CEO of Sprint, and he is SoftBank Executive. He remains the company's Executive Chairman, and was the Crisis Manager early on in 2019, when they were trying to navigate the failed IPO attempts and really get the business back on track. I think he has been heavily involved in building this leadership team and really trying to get things back on the rails. One of the things that really stuck out to me, and this was something that was meme that like crazy when the company that's going public in 2018 was, the company's mission statement. At the time it was, elevate the world's consciousness, which I think got some eye rolls from Wall Street. They have since changed that. Their mission statement now is, empowering tomorrow's world at work. Brian, I know you are someone who spends a lot of time looking at mission statements and perhaps more than a lot of other investors. What do you make of something like that?

Brian Feroldi: I think it was a change for the better. I mean, to elevate the world's consciousness. What does that even mean? What does that mean at its core? A good mission statement is a North Star for the company that it's aiming at and it uses to make decisions. Elevate the world's consciousness. What decision could you make if you were front-line worker? I'm going to make this decision to elevate the world's consciousness. It's meaningless. The new one, to empower tomorrow's world at work, that's better. It's definitely a step in the right direction. I think there's work to be done on it, but it's definitely a much better mission statement today than it was two years ago.

Dylan Lewis: Yeah, I think good mission statements put people in a position where strategically they know the work that they do and how it ties into that mission. There are clear lines for people and they can find that alignment. Whether they're at the C-suite for a company or they're a new hire and it's like Day 5, they can piece that together. This is a little bit more literal. I think it's helpful, for people to have it be a little bit more tangible. We have to talk financials and a huge part of the story, Brian, when this company has public was humongous revenue growth, we had year-over-year double in revenue and massive losses. Absolutely massive losses. Recently, we have seen this business/costs. We looked at them cutting back that they had to like over a lot of the employees around the failed IPO. I'm a little surprised looking at the subsequent years that have followed and what this company is projecting in terms of revenue.

Brian Feroldi: Yeah, I was like you. I was pleasantly surprised with how this company's topline actually held up throughout the COVID pandemic. We've seen so many travel companies, real estate companies report massive year-over-year declines in revenue. WeWork reported in 2019 $3.2 billion in revenue. In 2020, the pandemic year, it reported $3.2 billion in revenue. So that held up remarkably well. If you dial in on that more, there was a decline year-over-year, but it held up pretty well. Now, for 2021, the company is estimating that it's going to see the effects of the pandemic start to hit it. So for the full-year, it's only estimate that's going to do about $2.7 billion in revenue and occupancy is down. So everything is heading in the wrong direction. Now, moving forward, the company is going out there and saying that it believes that revenue is going to substantially increase from here as those COVID headwinds turning to COVID tailwinds.

Dylan Lewis: Yeah, and this is where being a SPAC probably helps them out a little bit because they can take that multiyear look and be a little bit more optimistic in some of those future year projections. Being able to say, "Hey, we had 2.7 billion in 2021. Or you know, that's, that's about where we see ourselves sitting and then 2024, we're coming in at just shy of 7 billion." It's a compelling story to tell people. I think, Brian, there's a lot of work to be done to make that happen. I don't know that the core concern around this company losing a lot of money has necessarily gone away based on what we're seeing in the financials?

Brian Feroldi: No, it hasn't. The company though, "profitability metric" that would accompany is touting is adjusted EBITDA, which is a metric that I do not like at all, but it is something worth looking at. The company did say that in 2019, its adjusted EBITDA was negative 1.9 billion of losses were huge in 2019. In 2020, that actually improved slightly to 1.8 billion. A lot of that was because of that cost-cutting. For 2021, the estimate is for the full-year, the company is going to lose 1.5 billion in adjusted EBITDA. Where the story gets interesting is the company actually believes that next year, 2022, with that estimated strong rebound on an adjusted EBITDA basis, it's going to be a positive number and that number is going to jump to all the way to two billion dollars by 2024. So the company believes that all of its cost-cutting measures that has done will result in profitability in "within the very short-term."

Dylan Lewis: I think that's going to be a major test for this management team, Brian, because one of the things that dog we work for a while when all of these things start coming out as after the IPO was these discussions and these interviews that Adam Neumann and folks had where they were saying, we have the ability to be profitable when we want to, we're choosing not to be profitable and what a lot of people ultimately cited was a community-based EBITDA number. Let's be honest, it was fun with numbers, and we know that those non-GAAP numbers can be really useful sometimes, but sometimes they can be used to paint a picture that they want to be able to sell to investors. I think knowing that that is the history where this company is coming from, I would look for this management team to paint a realistic picture of when profitability will happen. I think honestly like that is one of the key things to be scoring them against because it has been so growth at all costs oriented. Up until the failed IPO, I think that's something that they need to do to establish trust with investors.

Brian Feroldi: I think that's exactly right. We've looked at a few SPAC projections now and I will say that these are probably, at least on the revenue perspective, more on the realistic side than a lot of other ones that we've seen. I mean, the company isn't out there saying we're going to grow 70 percent compound annual growth rate of next five-years. They're essentially saying we expect a strong rebound in 2022. I don't think that's a crazy projection. Then from there, they're estimating roughly 20 percent top-line growth. So that is not a growth at any cost and a number that seems impossible to hit, it's rosy, but it's not impossible.

Dylan Lewis: Yeah, I agree. I felt like there was a healthy dose of reality in the numbers that we were seeing because, yes, the SPAC Land can get pretty wild, pretty fast. But I think people need to keep in mind that there's a large hurdle here with profitability with this business. I think they have yet to prove that they deserve the trust there. That is going to be one of the major ways I think that the public markets score this company and its management team.

Brian Feroldi: For sure. Now, actually funding the losses that are projected for the rest of the year, that is where the SPAC is really going to help. So we do have somewhat of a look at what they're pre- and post- IPO. SPAC balance sheet is going to look like. Earlier in the year, the company had about $650 million in cash and 3.5 billion and a net debt position. As a result of the SPAC, the company believes that its cash and funding commitments at us have. So not pure cash, but access to liquidity will be about $2.2 billion. If those adjusted EBITDA metrics are anywhere close to reality, that should be enough to see this company, to "profitability". So financially, the company is in a completely different space today than it was two years ago.

Dylan Lewis: Yeah. There were stories of them having a couple of months worth of funding at various points. To be in a spot where they've got a year locked in and they are posting to, we think the numbers are going to start changing pretty dramatically at this point. That it's bias and confidence. I think one of the things that's interesting when we look at these numbers and these decks on the backside is people can get pretty aggressive in what the future business looks like, Brian, and one other space where I think I was pleasantly surprised by the realism of what this management team is throwing out. There was what we are seeing in terms of the financial projections, they are rooted in the core business being the driver of this company. There are some things I think to be excited about. They want to out some new initiatives that they're looking at. I think we'll explore some optionality in their space. But at core, those numbers are going to be driven by their core leasing business.

Brian Feroldi: Which is something they've been doing now for more than 10 years. So yeah, I do like that, but they're saying the core WeWork business, the thing that we're known for is going to be the revenue driver moving forward.

Dylan Lewis: Yeah. I think four things to be excited about; they, I think, are going to move a little bit from the small and medium-sized business and increasingly go after some enterprise members and established relationships with some of those bigger companies. We're talking about it before. I think the timing could actually be really excellent for something like that. I think a lot of businesses are trying to reevaluate their physical footprint, especially in a lot of high-cost cities where there are a lot of WeWorks. It means that WeWork is going to have to assume a little bit of risk in order to execute on that. But there is something pretty interesting there for them, Brian.

Brian Feroldi: They already have a history of successfully landing those enterprise customers. So it's not crazy for them to say that they want to keep doing what they're doing. Again, they've landed Microsoft, Samsung, Slack, and companies at that size already. So they are already doing that.

Dylan Lewis: Yeah. Another thing to keep in mind and just watch out for as it develops over the next couple of years. They are increasingly interested in a platform approach. We heard a little bit about WEOS type thing when they were originally trying to come public. But this platform approach, basically flexible space management platform that connects enterprises and landlords, provides design, build, lease, operating, management, and community services. Brian, if I have that right, it sounds like it's a marketplace and landlord portal for commercial real estate.

Brian Feroldi: That's my interpretation too. Again, it's anyone's guess whether or not that business line is going to be successful or not. But a big thing that I look for in potential investments is optionality and more importantly, realistic optionality, not some pie-in-the-sky business that they're not related core business at all. I do think there are signs of that happening here, and I like the company is making those investments. But even within the core business, the opportunity is still very large.

Dylan Lewis: Yeah. I see that extension and that optionality as something that's related to their core companies. It's what they're good at. They are excellent at creating spaces that people want to be in. That has never been the issue. The design is basically category-defining for what people expect when it comes to the tech start-up world. It's just a matter of finding the right way for the unit economics that come together for them, for it to turn into a viable business.

Brian Feroldi: Yeah, there's a reason the company has been successful. I mean, you generate billions of dollars in revenue in less than 10 years unless you're doing something right. Now that they are fixing the management structure and the capital structure, the company does have a chance at long-term success.

Dylan Lewis: So we buried, I think maybe one of the most interesting details here, Brian, for the end looking at valuation. Back in 2019, this is a business that was shooting for evaluation somewhere in the high 40 billion range. That was roughly where the planned IPO was going to say. We're now looking at a business that will come to the public markets at roughly a nine billion dollar valuation. I think that's a pretty incredible haircut for a variety of reasons.

Brian Feroldi: That is a much more palatable for number four investors to swallow. If you've been an employee this whole time, it's no fun to see your stock options essentially go down in value by 80 percent. But I do think a nine billion dollar valuation, given the numbers that we're seeing, is much more palatable for investors.

Dylan Lewis: I think so too, and I think that the employee detail there, Brian, is interesting because my understanding with WeWork is options were generally how they were creating stakeholder alignment with our employees in using equity as a retention tool. It's a different animal if there are options than if they're just straight-up equity grants. This business is basically flat from the haircut that we anticipated when it was going to come public, there were rumors that was worth somewhere between 5-9 billion in 2019 in the aftermath of the IPO. But even if you go back to 2016, the company is worth 16 billion in private valuation rounds. So the folks that are still there and had very large equity grants or options grants. It's a little dicey in terms of how valuable that is as a retention tool.

Brian Feroldi: I really wonder what it's been like to work at this company for the last couple of years. I mean, all that they've gone through and then you have your options going to be essentially bust. On top of that, I'm sure that turnover at the headquarters has been very high. Now that the company has a management team in place, it's going to be really important for them to double-down on the values of the company and really focus on employee retention.

Dylan Lewis: I think that's right. The employee side, it's easier when you see these big collapses, I think to lean into the drama and focus on the details. I think the employees are the people I really feel for in the situation because for the most part those are those are folks that expect something in their compensation with some pretty decent upside. For the most part, they had the rug totally pulled out from underneath them.

Brian Feroldi: That's right. This is a chance for the company to make it right on that front.

Dylan Lewis: Brian, to put a bow on all of this. WeWork 2.0. Is this something you are at all interested?

Brian Feroldi: I'm going to say no. I mean, flat out, I wasn't really interested in WeWork 1.0. While WeWork 2.0 is definitely a much better company, I still think there's a tremendous amount of risk in here on this investment. It's not that I think the company is going to fail. Especially at this valuation there could be giant returns for investors, but when it comes to managing my own capital, I'm always thinking what is the best opportunity and the best companies out there. While this could be a good opportunity, I don't think it's the best. How about you?

Dylan Lewis: I think they're staring at something hard, just in terms of the challenges in front of business. For that reason, I think it's a little tough to be super excited. I do think there are probably more tailwinds here than people would give them credit for. The key is going to be, can they overcome some of the brand damage that happened to the company name, both for investors but also for consumers? Is it that in the rebrand and also in the aftermath of everything that happened post 2019, did that at all hurt people's expectations for this company? I think that's something to keep an eye on, but it's a fascinating story. I think we like to see redemption stories. They're fun to root for. I think it's one that I'll be paying attention to watching and hoping that they right the ship and that there is something good here.

Brian Feroldi: There's a lot of business lessons to learn from watching companies like this. While we always are, we're investors, so we're always focused on what's the story is on Wall Street and among investors, it's really hard for us to suss out what's the story for the actual customers? Did they care that the company's IPO failed? Probably not. What they care about is the price I'm paying worth the value that I'm getting. If the brand name hasn't been damaged on the consumer side, that might be something for investors to be excited about.

Dylan Lewis: For that I'll say, listeners, if you are a WeWork user or if you're in the co-working space, we always like getting reports from folks who use products. [email protected] or @MFIndustryFocus on Twitter. You can hit us up there. You can also hit up Brian Feroldi on Twitter. He's super active there and worth a follow. Brian, thanks for joining me on today's show.

Brian Feroldi: Thank you, Dylan.

Dylan Lewis: That's going to do it for this episode. If you're looking for more of our stuff, subscribe on iTunes, Spotify, or wherever you get your podcasts. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against stocks mentioned. So don't buy or sell anything based solely on what you hear. Thanks Tim Sparks for all his work behind the glass today and thank you for listening. Until next time, Fool on!