WeWork: Inside this $3.5B flex space giant’s turnaround
Our research shows that after all... there is a light at the end of the tunnel for the much-maligned real estate giant
We’re excited to offer TCT subscribers a sneak peek at Sacra’s report on WeWork.
The much-maligned flexible working company was once a household name, peaking at a valuation of $47B. After enduring a failed IPO, a tsunami of negative press, and becoming the butt of many jokes in Silicon Valley, we’re excited to share that there may actually be a light at the end of the tunnel for WeWork.
At Sacra, we created a proprietary revenue model, discounted cash flow analysis, and other metrics to determine WeWork’s value, risks and ultimately, its path forward in 2021 and beyond.
We interviewed WeWork insiders, including ex-employees, real estate brokers and developers, and customers to validate our assumptions and make sure the data is accurate.
You can read in its entirety for free here: WeWork: How the $3.5B Flex Space Giant is Engineering A Comeback.
WeWork’s road to redemption
Our DCF model gives WeWork a valuation of $3.5B. At this price, WeWork equity resembles a call option, with limited downside but asymmetric upside.
The site economics behind WeWork's core business are surprisingly positive. 24 months after opening, the average WeWork location can generate a 20% contribution margin, compared with economics from more stable peers. A big reason for WeWork’s cash burn was its lack of mature locations. In 2019, WeWork had the biggest flexible workspace footprint, but the lowest % of mature sites, compared with its profit-making peers.
WeWork has become much more prudent in new location openings. Mature locations are expected to grow to 50% by the end of 2020 and reach 100% in 2022.
WeWork has spent 2020 stabilizing its core operations with 4 key measures.
60% of WeWork's customers are now enterprises. During the pandemic, WeWork leased 3.5 million square feet to enterprise clients, including TikTok, Mastercard, Microsoft, Citigroup and Deloitte.
WeWork's new CEO is a real estate veteran. The current CEO is a disciplined operator with successful turnaround experience.
WeWork has rightsized its real estate portfolio. We estimate WeWork has exited 66 locations and amended about 150 leases, driving higher average occupancy and margins across it’s portfolio.
WeWork has cut costs. WeWork has shrunk its workforce by 60% and cut many experimental growth projects, such as WeLive, WeGrow and self-driving chairs. Operating expenses are trending down significantly, from 86% of revenue in 2018 to an estimated 50% in 2019.
Market dynamics are changing. Post-COVID, 80% of people want to return to the office a few days a week but keep the benefit of flexibility. Ironically, the downturn many thought would sink WeWork may become the very cause of its survival.
WeWork is quietly transitioning to an integrated, tech-enabled ecosystem coordinator. Despite the large cost-cutting, WeWork continues to invest in community services, aka, the "killer app". For example, WeWork Labs is a community digital platform. It provides cross-sector incubator services to support companies to acquire skills, meet peers and experts.
WeWork could reshape the real estate stack. It could leverage its physical locations and build a tech-enabled layer on top, thereby, transform into a middleware to connect people and optimize spaces.
As always, stay tuned for our TCT Exclusive interview tomorrow at 10AM PST / 2PM EST.