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.
