Down Almost 78%, Is This Stock a Screaming Buy?

Many companies whose business models relied on what life was like before the pandemic have been trying to find ways to adapt to the changes the pandemic created and move forward in what has become very different economic environment. The "new normal" has raised plenty of questions and left some struggling to find the right answers.

For instance, with hybrid work and work from home gaining in popularity and becoming permanent for some organizations, WeWork (WE) has become a company where a lot of investor interest is now directed at trying to answer "will they or won't they succeed?"

Enough investors have their doubts about the stock for this office-sharing facilitator that it is trading down almost 78% from its high set shortly after its October 2021 merger with a special purpose acquisition company (SPAC), which took the company public. But after looking at WeWork's financials, I'm wondering if the stock is oversold, creating a potential opportunity for investors who have the patience to cheer for an underdog. Let's take a closer look and see if WeWork is a screaming buy.

Lots of changes happening at WeWork

When WeWork founder Adam Neumann was unceremoniously ousted from the company for various misdeeds, including conflicts of interest and mismanagement related to a failed IPO effort in 2019, the future of WeWork was put in doubt. Fortunately, his replacement, CEO Sandeep Mathrani, was a great choice to right the ship and get WeWork running properly. Mathrani joined the company in February 2020, just before the pandemic hit, and managed to take WeWork public through the SPAC merger by October 2021. Despite the massive effect the pandemic has had on office occupancy in general, WeWork is finding new ways to manage in this changing office environment.

WeWork has gone from a model that focused primarily on renting desks to individual people, to a model that balances those solo workers with enterprise customers renting blocks of desks on behalf of workers. It has also been working on strategic partnerships with companies like software developer Yardi to provide added value to clients using the WeWork platform, including business customers using WeWork Workspace.  

WeWork versus the world

Are these changes making WeWork any more profitable? To answer that, we need to gauge what's normal right now for office occupancy. Kastle Systems maintains the Kastle Back-to-Work Barometer, which reports on office occupancy across the 10 biggest metros in the U.S. In mid-September, it showed a jump in office occupancy from a steady 43% up to 47.5%.

For WeWork, occupancy (which includes desks that are rented long-term, whether used daily or not) in its properties was at 72% for the three months ending June 30. That's up from the occupancy rate of 68% for the three months ending March 21, and a huge improvement over a rate of 59% for the three months ending Sept. 30, 2021. Although it's true that WeWork shed some locations in order to improve efficiency, the amount shed over that nine-month period was 15,000 desks, roughly 1.6% of the 932,000 desks available in September 2021.

This improved occupancy is related to an improvement in overall sentiment about office occupancy, but it's more due to an increase in memberships. WeWork had 578,000 memberships in September 2021 and 720,000 in June 2022, a 24.6% increase. This has led to significant increases in revenue as well. Revenue in its most recently reported quarter was $815 million, up 37% from $593 million in the same time period a year prior.

WeWork is still losing money, but it has made changes that have helped slow WeWork's hemorrhaging down significantly. Loss from operations in the latest quarter was $316 million, down 62% from 2021's $851 million loss.

But will WeWork make money?

The economy is quite volatile at the moment, making earnings forecasts even harder, but the signs are certainly looking good for WeWork. Simply tracking WeWork's earnings before interest, taxes, depreciation, and amortization (EBITDA) shows massive improvements quarter over quarter since the second quarter of 2021.

Source: WeWork Form 8-K for June 2022.

In Q2 2021, WeWork had an EBITDA loss of $449 million. By Q2 2022, that EBITDA loss had been reduced to just $134 million. This is a 70% increase in income in just a year, after a significant stint of elevated losses prior to 2021.

If your household finances have ever been thrown into a pickle due to a surprise major expense, you understand what needs to be done. You keep doing all you can to reduce that debt until you finally get back to profitability. That's exactly what WeWork is doing right now. As these carefully considered moves continue, so should its income improve. This shows WeWork still has potential for profitability.

Does all this mean WeWork stock is a buy? I think so, yes. I own WeWork and I am periodically adding to my position. Despite how the business has been mishandled in its past, it's still a disruptor in the office real estate space. The company is making a name for itself, but in a good way this time, and that bodes well for the stock.