Amid growing pressure in the commercial real estate industry, co-working firm WeWork Inc. (ticker: WE) released a warning in early August about a potential bankruptcy. Its shares sank 38% to 13 cents by the Aug. 9 market close.
In a 10-Q filing on Aug. 8, WeWork made major concessions that suggested the walls were closing in on the once-heralded startup. WeWork indicated it had doubts about the company’s ability to keep its shares listed on the New York Stock Exchange, its ability to raise capital in the future and its challenges related to liquidity.
Heavily hyped companies fall from grace, and the stock’s 87% year-to-date drop as of Aug. 15 hasn’t surprised many investors. However, the stock’s recent price movement has shocked most of them.
WeWork’s shares soared about 70% from Aug. 9 to Aug. 14, to 22 cents. The share price has since pulled back a bit, closing at 19 cents on Aug. 15, and the company has a current market capitalization of about $142 million.
WeWork is not the first stock to rise despite financial troubles. Other companies that hit meme stock status recently, such as Tupperware Brands Corp. (TUP) and trucking giant Yellow Corp. (YELL), also saw their share prices jump unexpectedly. YELL has since been delisted as of Aug. 16, following Yellow’s bankruptcy.
Do bankruptcy announcements provide buying opportunities? For most people, the answer is no.
Still, WeWork’s rise, fall and meme rally offer many lessons for investors about the stock market, startups and the remote work trend. It’s been a ride, and here are some of the takeaways from the WeWork roller coaster:
— What is WeWork?
— Lesson 1: The meme stock trend is not going away.
— Lesson 2: Investors must do their own research.
— Lesson 3: The remote work trend has staying power.
— Lesson 4: Uptick in SPACs, meme rallies can precede a downturn.
What Is WeWork?
WeWork provides co-working spaces and technology solutions for businesses, freelancers and anyone else who wants office space. Backed by SoftBank Group Corp. (OTC: SFTBY), a Japanese conglomerate, the company established its roots in SoHo in Manhattan, New York, in 2010. WeWork became popular, and the tech unicorn commanded a $47 billion valuation at its peak, pumped up by SoftBank investments.
WeWork’s struggles were so dramatic that a Hulu documentary chronicled what took place, but here’s the summary:
Co-founder Adam Neumann, as portrayed in the documentary, led a toxic work environment and generated controversy during his time at the company. Employees were restricted to eating only plant-based meals to “help the environment,” even though Neumann flew on a private jet. During the company’s first attempt at going public, investors discovered that Neumann was accused of using the company’s funds to cover personal expenses.
The company postponed its initial public offering, or IPO, and Neumann was ousted from the company in 2019. Then, the world endured COVID-19 lockdowns that prevented WeWork from operating at the same capacity.
While the dark clouds grew over time, WeWork’s business model was called into question from the start. The company leased office space and never owned any of its buildings. This strategy limited WeWork’s ability to reduce costs and made it vulnerable to rent hikes. The company would then be forced to rely on investors to keep it alive.
WeWork is still in business, but the company continues to burn through cash. A potential NYSE delisting and the bankruptcy warning do not suggest a happy ending for the struggling company.
Lesson 1: The Meme Stock Trend Is Not Going Away
WeWork speculators have been back in force over the past few days. The stock shouldn’t have nearly doubled due to bankruptcy fears, but as the trading of AMC Entertainment Holdings Inc. (AMC), Nikola Corp. (NKLA) and Hertz Global Holdings Inc. (HTZ) shares have demonstrated, that may be a surviving trend.
Investors who initiate these rallies can capitalize on smaller market caps. If a company is less valuable, it’s easier to move the stock price by purchasing additional shares. A $10 million investment will generate more price movement if the stock has a $500 million market cap compared to a $1 trillion market cap.
Social media groups make it easier for retail investors to organize and bring up stock prices in short bursts. However, these meme rallies can resemble Ponzi schemes. There isn’t a long-term bullish thesis for WeWork, and investors buying now hope that the people behind them will continue to bid up the price.
While hopes for price gains exist for any stock, corporations can release good earnings reports and announce positive developments that legitimize appreciation. WeWork hasn’t given investors any reason to be confident.
The meme stock rally also captures how bullish markets can cause investors to overlook net losses as long as revenue growth is good. While WeWork’s 4% year-over-year consolidated revenue growth is not exactly impressive, the company also reported a $397 million net loss in the second quarter.
Investors punished stocks with top-line growth and rising net losses in 2022, but the trend seems to have reversed so far in 2023.
Lesson 2: Investors Must Do Their Own Research
WeWork reported second-quarter earnings shortly after releasing a warning about potentially going bankrupt. However, investors who only saw the press release for company earnings wouldn’t have noticed the negative sentiment.
In that press release, WeWork Interim CEO David Tolley expressed faith in the company’s long-term prospects: “We are confident in our ability to meet the evolving workplace needs of businesses of all sizes across sectors and geographies, and our long-term company vision remains unchanged.” Former CEO Sandeep Mathrani stepped down in May.
Some investors make the mistake of taking lofty promises at face value without wondering how a company will back them up. SoftBank invested $16.9 billion into WeWork over the years, which in turn may have led some investors to jump on the bandwagon.
Electric vehicle maker Nikola also set grandiose goals that helped the company rise from $10 per share to about $80 per share within a few months. The company faces many of the same challenges as WeWork, along with a similar backstory of an overpromising and controversial company leader.
Quarterly results help investors assess a company’s financial performance. However, what the company’s leadership says about the company can contrast with reality.
Investors should know what criteria matter to them most and not take analysts’ or executives’ comments as infallible. Formulating your own opinion while interpreting information as it arrives can lead to better investment decisions.
Lesson 3: The Remote Work Trend Has Staying Power
Remote work is a major catalyst for declining commercial property values and lower foot traffic. According to a McKinsey Global Institute report, office occupancy has stabilized at 30% below its pre-pandemic levels. The study highlights an extreme scenario where office space occupancy could fall further to 38% lower than pre-pandemic levels in 2030.
WeWork’s business model depends on people working in offices. The company already faced bankruptcy concerns before going public in 2021 via a special-purpose acquisition company, or SPAC, merger. However, the stickiness of remote work and return-to-office policies facing immense pushback have worsened the company’s financials.
Some companies remain committed to preserving the value of their commercial real estate, but more corporations are waving the white flag. For example, Salesforce Inc. (CRM) recently vacated its 30-story Salesforce East building in San Francisco.
While remote work is here to stay, it’s important to remember that WeWork’s business model still had holes during the longest bull market in history. Commercial real estate investors have plenty of reasons to worry about the rise of remote workers, but WeWork arguably operated an unsustainable business model from the start.
Lesson 4: Uptick in SPACs, Meme Rallies Can Precede a Downturn
WeWork stock didn’t have any real reason to gain 70% within five days. Bankruptcies are never a good sign for investors because of the possibility of losing your entire investment within a short period.
Some investors are calling WeWork a meme stock based on its recent movements, and the label may be justified. Two of the most famous meme stocks, GameStop Corp. (GME) and AMC Entertainment, saw similar volatility. GameStop reached astronomical price levels at the beginning of 2021 after online stock traders on Reddit orchestrated a targeted buying campaign to trigger a short squeeze, catching Wall Street off guard. AMC short traders were later squeezed in 2021, bringing the stock from less than $2 to as high as $73 within six months.
In 2021, tech stocks had a good year, as near-zero interest rates and high revenue growth caused many investors to overlook net losses. In 2022, investors had a rude wake-up call, but tech stocks have performed surprisingly well in 2023. The Nasdaq 100 is up by 37% year to date as of Aug. 15.
The return of meme stock trading can suggest a late stage within the market’s bullish sentiment. SPACs were popular in 2021 leading up to the downturn in 2022, for example, and they were also popular leading up to the Great Recession of 2007-2009. The number of SPACs jumped from 40 in 2006 to 66 in 2007, marking a 65% year-over-year increase.
Several macroeconomic concerns, such as student loan payments, rising inflation, interest rate hikes and over $1 trillion in consumer credit card debt (an all-time high), threaten to upend bullish sentiment. And meme stock rallies like the WeWork run-up can also hint at the final moments of a fizzling market rally.
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