Can WeWork Sustain Its High Growth – The Key To Its Lofty Valuation?

SFTBY: Softbank Corp Unsponsored ADR (Japan) logo
SFTBY
Softbank Corp Unsponsored ADR (Japan)

The collaborative workspace industry is witnessing exponential growth. As enterprises look for efficient workspace solutions which are managed externally, and startups and freelancers explore better infrastructure to work in, the co-working industry is gaining momentum. According to GCUC, the collaborative work spaces industry is likely to grow at an annual growth rate of nearly 16% in the next five years.

WeWork, an eight-year-old leader in this segment, is making the most of this growth. The company’s philosophy and proposition of “space as a service” has found favor with many enterprises and individual users. While this industry has seen several new entrants in the past few years (such as Industrious, launched in 2013) and continues to attract new players (Hooters, the latest entrant in Tokyo), whose offerings are similar to WeWork, the latter is enjoying its first mover’s advantage.

WeWork doubled its members between 2016-2017 and is expecting a 100% increase in members between 2017-2018. It commands a nearly 12% market share in terms of total co-working members.  Enterprise members account for 25% of its global membership. In its latest round of funding by Softbank, WeWork was valued at $20 billion, and its global growth potential is one of the key drivers for this high valuation.

Relevant Articles
  1. Will Johnson & Johnson Stock Rebound To Its Pre-Inflation Shock Highs of $185?
  2. Should You Pick Eli Lilly Stock After A 4x Rise In Three Years?
  3. Down 9% This Year, What’s Next For Lululemon’s Stock Past Q4 Results?
  4. Down 14% In The Last Trading Session, Where Is Adobe Stock Headed?
  5. Will Higher Federal Government Spending, Gen AI Drive Digital Security Stocks Like CrowdStrike Higher?
  6. Up 30% In A Year Is FedEx Stock A Better Pick Over UPS?

Our interactive dashboard for WeWork analyzes the key drivers of the company’s valuation, and you can modify the inputs to understand the impact of member/revenue growth on the company’s results and valuation.

According to this analysis, based on WeWork’s projected revenues of $2.3 billion for 2018, the company commands a price to revenue multiple of 8.5X (on the aforementioned $20 billion valuation), which is much higher than its sole listed competitor, Regus, which is trading at a multiple of 1.08x revenue. Although the comparison of WeWork (which is 8 years old) with Regus (a 30-year old company) might not be very worthy, it gives a perspective of where WeWork stands vis-a-vis the only listed player in this segment. Several other new competitors are vying for market share in this industry such as Industrious, Galvanize, Techspace, and Serendipity Labs, however data for these companies is not available for a comparison for WeWork. Most of these new players operate locally while WeWork is expanding globally. Further, despite being an established player in the industry, Regus is trying to modify part of its workstations and making them trendier to compete with WeWork.

The high price-to-sales multiple of WeWork is justified by the fact that it is expanding exponentially and can generate much higher revenues compared to its competitors.  According to Steve King, partner of Emergent Research, WeWork has the capabilities to build a space at half the time and 70% of the cost of a real estate company, due to its economies of scale. Each of WeWork’s newer competitors are trying to be unique in their own sense – Industrious is pitching itself to be a “premium” co-working space appealing to the older population, while WeWork’s “trendy” appeal is finding favor with millennials. WeWork’s pitch to large corporates of managing their offices (which could be an entire building) differentiates it from other players and this can help the company grow faster and generate more revenues.

WeWork has doubled its members between 2016-2017 and is projecting a membership of  400,000 in 2018 (another 100% increase). Its closest listed competitor, Regus, on the other hand, has registered a growth of around 7% in its membership between 2016-2017. While this comparison might not be worthy, given that both companies are at a different stage in their life-cycle, it gives a perspective of growth among other players. Since most of WeWork’s newer competitors are early stage start-ups, data around their revenues and growth is not available.

Based on the growth in the co-working space industry, WeWork can generate revenues of more than $4 billion in 2022.

As shown in the above charts as per GCUC estimates, the total universe of co-working members in 2022 would be 5 million. We assume that WeWork’s market share might decrease to around 15% by 2022 (from the estimated 17% number of 2018), given the presence of new local players. With a market share of 15%, WeWork should have around 765,000 members in 2022. In 2018, WeWork is likely to generate around $5,750 per member (total estimated revenue/total number of members). We expect that with competitive pressures (offering spaces at lower costs to attract more users), this number can fall to $5,000 by 2022.  Based on these numbers, WeWork can generate a total revenue of $4 billion in the next five years. You can modify these numbers in our interactive dashboard to create different scenarios.

While these revenues could be higher than its competitors, this growth might not be enough for the company to generate positive operating cash flows, since it has huge lease commitments, of which $5 billion are payable in the next five years.

Continuity of members and regular use of services is a key factor in determining the revenue and profitability of WeWork. WeWork’s strategy to target enterprises and become a real estate services provider can work in its favor. Further the company is using a large data set and technology to identify ideal office locations, create the optimal office design, determine the size of its conference rooms, thus providing infrastructure as per customer expectations.

The “future of work” will see many changes in the evolving habits of workers. Microsoft, IBM, Google will all help people become more efficient and perhaps, gain time to do more work in a day. Changing habits of where and how people work will continue to evolve. WeWorks’ customers are generally small companies, individuals, and start-ups — perhaps dreaming of the day they become as large as Facebook.  WeWork needs to continue to  grow at a fast pace to justify its high valuation. This will also be a function of the growth in the industry and aggressiveness of its competitors. Likely expansion into other areas, such as dormitory services and meet-ups, can also generate higher revenues in the future.

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs
Like our charts? Explore example interactive dashboards and create your own.