WeWork’s Stock Is Plummeting Despite Flexible Workspace Industry Growth

• Over the past year, WeWork Inc.’s stock has traded down from around $15.00 to around $5.00, a fall of two-thirds — twice as far as the market average. 
• Demand for flexible workspace is eclipsing pre-pandemic levels and contractual occupancy rates have remained above pre-pandemic levels for the third quarter in a row. 
• When WeWork’s stock crashed, it fell from such a height that it did a lot of damage, most notably to Softbank, its largest shareholder. 

Over the past year, WeWork Inc.’s (WE) stock has traded down from around $15.00 to around $5.00, a fall of two-thirds, compared to a fall of one-third in the S&P 500 over the same period. WE has fallen twice as far as the market average. Why? 

As a comparison, its main global rival, IWG plc (owner of Regus and Spaces brands), has fallen by just under half. To be fair, though, IWG’s principal listing is in London and the FTSE 100 is slightly above where it was a year ago. So relative to each company’s main market, they are about even. Evenly bad, that is. 

The other principal coworking company Servcorp, listed in its Australian home market, is a touch below where it was a year ago, though it has been 50% higher during the last 52 weeks. Its market cap at £180 million sterling ($216 million) makes it a minnow compared to IWG £1.9 billion ($2.28 billion) and WE £3.5 billion ($4.2 billion). 

What do these falling stock prices mean for coworking?  

You would be justified in thinking that the share price movements indicate a problem in the coworking business, but on the ground, trading conditions remain positive. The leading agent in this sector in the U.K., Douglas Green, has been in the business longer even than my own 22 years, and his views are therefore worth paying attention to.  

Green recently posted on LinkedIn his take on some new research from Instant Group and chose to highlight a number of key points: 

• Demand for flexible workspace is eclipsing pre-pandemic levels and contractual occupancy rates have remained above pre-pandemic levels for the third quarter in a row. Amenity-rich spaces deliver the highest occupancy rates: 82% vs. 74% in traditional spaces. 
• Average prices are rising — London West End desk rate: £690 (+5% vs. previous six months), City: £607 (+3%). In the regions: Liverpool: +17%, Cardiff: +6%, Bristol: +4%, Edinburgh: +11%, Leeds: +14%, Manchester: +4% 
• The average price per private office desk in the U.K. was £525 in H1 2022 up 22% year-over-year, surpassing pre-Covid prices by 13%. Regional desk rates reached £298, a rise of 17% year-over-year 
• There are now over 6,000 flexible workspaces across the U.K., with a forecast of over 9,000 by 2026. That’s a growth of 50% in three years. 

Douglas’s overall conclusion, with which I fully concur, was that “this data provides more proof of the extraordinary growth of the Flex sector, and is consistent with my previous prediction that the industry will double in size over the next five years.”  

The data he quoted is all U.K. derived, but I doubt that it is much different in the U.S. market, as the Covid effect is still keeping workers away from major city center offices in both countries. 

The impact of WeWork’s crash 

So, again, why has the WE share price fallen so far? Part of the reason is that it had further to fall than IWG’s. Under the leadership of its founder Adam Neumann, WE’s share price had risen to levels normally reserved for revolutionary tech giants. So when it crashed down to earth, it fell from such a height that it did a lot of damage, most notably to Softbank, its largest shareholder. 

It would be logical to assume that if a major company bites the dust in a spectacular fashion, its rivals would benefit, but this did not happen with IWG. Perhaps because the market was left wondering if there was a problem with the business model itself? Guilt by association. 

How do WeWork’s and IWG’s financials compare?  

Turning now to the financials, both companies were in the red at the end of 2021, but WE has never made a profit in its history and IWG was profitable before the pandemic struck. It will be interesting to compare their performance from the beginning of this year, once the market has had time to digest the IWG interim numbers, which came out this week. As of January 2022, their annual revenues were almost the same: $2.7 billion.  

IWG used those revenues to make a gross profit of $292 million, but WE recorded a loss of $515 million, nicely illustrating one of the major problems the post-Neumann board has to tackle — an inflated cost base.  

To give it credit, the board has managed to shave half a billion off the peak 2020 costs number, but it remains 50% higher than IWG’s; future cost cutting is bound to get progressively more difficult. 

Unlike Adam Neumann, IWG’s Mark Dixon has probably never been thought of as angelic, but he has in his own way been a visionary — even if the vision was more prosaic than WeWork’s “elevating the world’s consciousness.”  

The latest manifestation of the Dixonian vision can be seen in the merger with Instant Group and daVinci Virtual, which I take as a recognition of how important the role of technology will be in the future as a driver of income and value for space providers.  

If IWG can drive revenues and efficiencies with technology (as some of the smaller private businesses in this space have done), it may prove to be the game changer that franchising, its last major initiative, has so far not been.  

At the risk of repeating myself, I can still see no justification for the gap in market cap. between WE and IWG. It did not surprise me that IWG was profitable in H1 2022, at least at the operating level; it is not conceivable that WE will be.  

Private equity firms have looked at IWG before, but so far none have bid. I will never really understand what they saw in WE under Adam Neumann, nor why they find it so difficult to do a deal with Mark Dixon.