More than a dozen years ago, I gave thought to betting $1,000 on Bitcoin
BTC
Since BTC struck me in that 2011 piece on Forbes.com as an easy-to-steal thought experiment whose anonymity made it useful for drug dealers and terrorists, I opted not to make the bet.
If I had bet $1,000 back then — at, say, 5 cents/BTC, my 20,000 BTC would have been worth a tidy $524.8 million as of Aug. 18, 2023. Whoops.
That kind of missed investing opportunity comes to mind in considering WeWork, the workspace-sharing company, whose stock fell 11% to 14 cents a share on August 18. That drop came after announcing a 1-for-40 reverse stock split in a bid to remain listed on the New York Stock Exchange, noted AP.
Does WeWork’s low stock price — down 99% from its October 2021 peak — make it worth trying the kind of $1,000 bet I did not make 12 years ago on BTC? I see five reasons to pass:
- Risk of losing its NYSE listing
- “Substantial doubt” of continuing as a “going concern”
- New board members with bankruptcy expertise
- Weak financial condition
- Deeper cut to its credit rating
I asked WeWork for comment and will update this post if I receive a reply.
WeWork’s 40-for-1 Stock Split
WeWork announced August 18 it is moving forward with a 1-for-40 reverse stock split in a bid to maintain its NYSE listing, AP noted.
The stock split will be effective September 1 — after which every 40 shares an investor holds will become a single share. WeWork’s Class A stock will start trading on a post-split basis at the market open on September 5, AP reported.
WeWork does not expect the reverse stock split to impact its current or future business operations.
Risk Of Losing NYSE Listing
On April 12, the NYSE issued WeWork a continued listing standard notice after shares — which had been trading below $1 a share since late March — closed below an average of $1 over a 30-day trading span.
WeWork wants to remain listed on the NYSE — hence the reverse stock split. According to a WeWork SEC filing, “The Reverse Stock Split is being effected to regain compliance with the $1.00 per share minimum closing price required to maintain continued listing on the New York Stock Exchange.”
While having no impact on WeWork’s business operations, were its shares trading at 14 cents before the reverse stock split, the new shares — each equivalent to 40 of the pre-reverse-st0ck-split shares — would trade at $5.60 each.
Were WeWork’s new shares to trade above $1 a share for long enough, perhaps the NYSE would allow the company to maintain its listing there.
There Are Doubts WeWork Can Continue As A Company
While the reverse stock split could give it some breathing room, WeWork’s August 8 announcement suggests its stability is disappearing fast. According to CNBC, that’s when the company said its “mounting losses and dwindling cash ‘raise substantial doubt about our ability to continue as a going concern.’ ”
According to a company statement, WeWork’s “ability to continue as a going concern is contingent upon successful execution of management’s plan to improve liquidity and profitability over the next 12 months, which includes, without limitation:
- Reducing rent and tenancy costs via restructuring actions and negotiation of more favorable lease terms;
- Increasing revenue by reducing member churn and increasing new sales;
- Controlling expenses and limiting capital expenditures; and
- Seeking additional capital via issuance of debt or equity securities or asset sales.”
WeWork is impressed with its revenue growth and profitability improvements. As Interim Chief Executive Officer David Tolley said in a statement, “In a difficult operating environment, we have delivered solid year-over-year revenue growth and dramatic profitability improvements.”
WeWork accomplished this in the face of significant co-working industry headwinds. “Excess supply in commercial real estate, increasing competition in flexible space and macroeconomic volatility drove higher member churn and softer demand than we anticipated, resulting in a slight decline in memberships,” Tolley stated.
New Board Members With Bankruptcy Expertise
Earlier in August WeWork lost some of the talent Tolley extolled. According to the Wall Street Journal, three directors who disagreed with its governance and strategy quit WeWork — only to be replaced by three new people with extensive bankruptcy expertise.
This shift does not inspire confidence. After all, Daniel Hurwitz, Vivek Ranadivé and Véronique Laury — the directors who resigned earlier in August — made the move due to “a material disagreement regarding board governance and the company’s strategic and tactical direction,” the Journal reported.
While the source of their disagreement is not clear, it could be WeWork’s business model: The company makes what I think is a fundamental error — the workspace sharer leases office space long and sublets it short.
More specifically, WeWork signs long-term office space leases and “effectively sublets desks to companies short-term” forcing WeWork to pay rent whether its desks — which were 67% occupied in the second quarter — are full or not, the Journal noted.
As I wrote in June 2023, WeWork’s business model is particularly precarious with so much excess corporate real estate on the market as workers resist commuting to offices five days a week.
Naturally, the addition of three directors with bankruptcy expertise does not make much sense unless there is a high likelihood WeWork is heading for a financial restructuring, which would likely wipe out shareholders.
Weak Financial Position
While WeWork’s revenue increased and its losses declined — both fell short of expectations in the second quarter of 2023. What’s more, WeWork’s balance sheet does not look strong and it is burning through cash. Finally, its obligations for the second half of this year exceed the cash on its balance sheet at the end of June.
Here are WeWork’s key second quarter 2023 numbers from MarketWatch:
- Revenue: $844 million — was up 3.6% from the year before and $6.2 million short of the FactSet analyst consensus.
- Net loss: $397 million — a $180 million improvement over the company’s Q2 2022 net loss.
- Loss per share: 21 cents — 55 cents less bad than the year before, but nine cents a share short of the analyst consensus.
WeWork’s financial condition does not look strong. Its balance sheet held a mere $205 million in cash and equivalents and $2.91 billion in long-term debt at the end of June 2023, CNBC reported.
Could WeWork be heading for bankruptcy? At the end of June, WeWork’s liabilities of roughly $18.6 billion exceeded its assets of $15.1 billion, according to an SEC filing, leaving it with negative equity of about $3.5 billion. In general, this is a sign of “asset deficiency and an indicator a company may default on its obligations and be headed for bankruptcy,” according to Investopedia.
WeWork burned through $646 million in free cash flow in the first half of 2023, according to the company’s SEC filing. Were WeWork to continue to burn cash at that rate and not raise more, it would run out of money within a year.
WeWork’s contractual obligations for the second half of 2023 are more than six times the company’s June cash balance. According to its SEC filing, between June 2023 and “2028 and beyond,” WeWork’s total contractual obligations are nearly $29 billion — with about $1.3 billion due in the second half of 2023 and another $2.4 billion to be paid out in 2024.
Deeper Cut To Credit Rating
If WeWork needs to borrow more, it will probably come at a higher price. How so? On August 16, Fitch cut WeWork’s credit rating “further into junk territory,” according to Financial Review. Lenders will expect to be compensated for the higher risk.
In lowering WeWork’s long-term issuer default ratings from “CC’ to ‘CCC-,” Fitch wrote, the decision follows “worse than expected second-quarter financial results, a public warning that the company’s ability to continue as a going concern over the next 12 months will be contingent on improving its liquidity, resignations of key executives and board members, and the replacement of board members with restructuring experts.”
In May, Fitch expressed optimism that WeWork would “continue to exist.” By August, the ratings agency noted “the necessary improvements” had not materialized and “WeWork continues to burn through cash,” Financial Review reported.
Could WeWork Stock Rise?
To be sure, there are reasons in favor of buying WeWork shares now. There is a modest short interest — 2.57% of its float is sold short, according to Morningstar. This could boost WeWork stock were the company to report expectations-beating results, which would force short sellers to buy the rising stock to cover their bearish positions.
Moreover, on August 8 WeWork expressed confidence in its future. As Tolley said, “We are confident in our ability to meet the evolving workplace needs of businesses of all sizes…The talent and energy of the WeWork team is extraordinary and we are resolutely focused on delivering for our members for the long term.”
WeWork’s “transformation continues at pace, with a laser focus on member retention and growth, doubling down on our real estate portfolio optimization efforts, and maintaining a disciplined approach to reducing operating costs,” Tolley added.
If you think Tolley’s turnaround will enable WeWork to remain a going concern, buy the stock. But for these five reasons outline above, I am not persuaded.
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