Since its initial public offering in October 2021, WeWork (WE +0.00%) shares have plummeted 40%. The workspace solutions company says its mission is to "empower tomorrow's world at work." Whether it's the future of work or not, investors want to know: Is it a buy right now? Let's dig in and see.
Image source: Getty Images.
Bull Case: Increasing occupancy leads to narrowing losses
The bull case for WeWork relies on an assumption: Flexible workspace is the wave of the future. As the potential up-and-coming company says, "Like e-commerce in the early 2000s, flexible space is expected to reach critical mass over the next decade."
After looking at WeWork's list of customers, it's easy to see the company's point. Fully 63% of the Fortune 100 are already WeWork customers, including Netflix, Goldman Sachs, and Amazon, to name only a few.
However, if the company is to be profitable, it has to do more than simply attract famous customers. It has to increase its occupancy rate.
Source: WeWork
As the above chart shows, most of WeWork's office space ( about 73% of its capacity) falls below a 70% occupancy rate. This is a crucial challenge, because the 70% occupancy rate is a demarcation line between profitable and unprofitable buildings.
The bullish case relies on WeWork getting a substantial number of properties over this key hurdle, and it's not unrealistic. More than 53% of its capacity currently has 50%-70% occupancy rates. If the pandemic recedes, that might be just the catalyst needed to push WeWork over the top and bring it closer to profitability.
Bear Case: Losses continue to spiral higher
On the other hand, we still don't know precisely how the pandemic has changed how the world works -- or even if the virus has even been contained. Many employees worked remotely during the past two years. Some of them may never return to an office.
Moreover, WeWork's problems might run deeper than the pandemic. Looking at a long-term view of its revenue and huge net losses, the scope of the company's challenge becomes clear.
Source: Statista.
Despite growing annual revenues from $436 million in 2016 to $3.5 billion in 2019 before the pandemic shut things down, the company has never turned a profit. Even worse, its losses soared to $4.6 billion in 2021 while revenue tumbled.
WeWork has lots of work to do before I'll invest
I'm skeptical that WeWork has what it takes to turn things around. The company expects to narrow its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss to between $400 million to $500 million in 2022. That would be an improvement from the $1.5 billion adjusted EBITDA loss in 2021. Nevertheless, I'm unconvinced by the company's business model; I'd rather invest elsewhere.
