Don’t fall for hype – The WeWork story

WeWork has lost 97% of its value since it hit its peak in 2019, when there was tremendous hype around the company.

Adam Neumann and Miguel Mckelvey co-founded WeWork in 2010 as a community office space company similar to Regus.

It specialises in leasing large office space, subdividing it into smaller units, refurbishing it, and sub-leasing it as communal offices at a profit.

Neumann created tremendous hype around WeWork by selling it as a company “leading a workspace revolution” and creating the “future of workspace.”

WeWork differentiated itself from more traditional offices through lavish additions like gyms, yoga classes, bars, and other entertaining features.

Neumann’s charisma, vision, and big plans swayed many investors, including JP Morgan Chase & Co and the Softbank Vision Fund.

Numbers released by WeWork management pointed to incredible growth, with a rapidly growing footprint of 528 locations across 111 cities.

It seemed like one of the world’s biggest success stories, and at its peak in January 2019, WeWork was valued at $47 billion.

However, the fairy tale ended after WeWork opened its books before its highly anticipated IPO in 2019.

For a company to list in the United States, it has to file an initial registration with the SEC – an S-1 filing.

The S-1 filing contains business and financial information that was not publicly known prior to the IPO registration.

WeWork’s S-1 filing revealed serious problems. Analysts highlighted numerous concerns, including huge losses underpinned by extreme overspending.

It also had a complex and puzzling corporate structure, with Neumann at the centre of many conflicts of interest.

The S-1 filing led to a postponement of the IPO, and Neumann was removed as CEO. He reportedly received an exit package worth hundreds of millions of dollars.

There were also complaints about a toxic work environment with overworked employees, poor salaries, and mandatory attendance at social events.

WeWork versus IWG (Regus)

Analysts who were not bedazzled by Neumann, and his promises of changing the world highlighted that WeWork’s valuation was ludicrous.

They compared WeWork with a similar company – IWG (Regus) – which operates the same business of communal office space.

The price-to-sales ratio of the two businesses was telling.

WeWork’s $47 billion valuation translated to a price-to-sales ratio of 13.6 times. Compare that to IWG’s price-to-sale ratio of 0.8 times, and the problem becomes clear.

In 2019, IWG’s market cap was less than a tenth that of WeWork’s despite having better management, a better track record, more office space, and more diversification.

WeWork eventually got listed on the New York Stock Exchange in October 2021 – two years after its failed IPO – through a SPAC.

At listing, it had a market cap of $8.2 billion, a long way from its $47 billion valuation in 2019.

Since its listing fourteen months ago, its share price has fallen from $11.78 to $1.80 – an 85% loss.

Its market cap has plummeted to $1.3 billion, a 97% drop from its peak of $47 billion, as it continues to pile up losses. In 2021, WeWork made a total net loss of $4.44 billion.

The WeWork story should warn investors that hype can be dangerous and lead to huge losses. It shows that promises and profits seldom match.