Investors Ignore WeWork's Shaky Fundamentals on Strong Day of Trading

One of Wall Street's biggest winners of the day is WeWork, a real estate services company that provides provides flexible workspace solutions to individuals and organizations worldwide. Its shares have climbed 12.5% to a price of $2.97 -- 67.47% below its average analyst target price of $9.13. The average analyst rating for the stock is buy. WE may have outstripped the S&P 500 index by 9.7% so far today, but it has lagged behind the index by 62.2% over the last year, returning -77.6%.

WeWork does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (Eps) values of $-1.05 and $-7.77. We can see that WE has a forward P/E ratio of -2.8 and a trailing P/E ratio of -0.4.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US real estate companies is 27.16, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

To gauge the health of WeWork's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof. WE's average gross profit margins over the last four years are 75.4%, which indicate it has a potential competitive advantage in its market. These margins have slightly increased over the last four years, with an average growth rate of 1.5%.

On the other hand, WeWork's operating margins are dismal. When we take into account the company's taxes and operating costs, margins have always been below -100% for the last four years--and they're getting worse. The company's operating margins are decreasing by -22.25 every year on average since 2018. In other words, the company's business model is not generating any profit.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From WeWork's last four annual reports, we are able to obtain the following rundown of its free cash flow:

  • 2021 free cash flow: $-2,208,832,000.00
  • 2020 free cash flow: $-2,298,240,000.00
  • 2019 free cash flow: $-3,936,330,000.00
  • 2018 free cash flow: $-2,231,749,000.00
  • Average free cash flow: $-2,668,787,750.00 %
  • Average free cash flown growth rate: -10.3 %
  • Coefficient of variability (the lower the better): 31.7 %

If it weren't negative, the free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for WE, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.

With a negative P/E ratio, no published P/B ratio, and a regular stream of negative cash flows, we can conclude that WeWork is probably overvalued at current prices. The stock presents mixed growth indicators. Although it has strong gross margins, its negative operating margins are a definite red flag. Thanks for dropping by! If you liked this article, please subscribe to our newsletter -- it's free and delivered daily!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.