Adam Neumann's Last Laugh

Not your normal company... To WeWork, bankruptcy equals 'successful'... Blame the 'community'... Buildings and treadmills aren't iPhones... Adam Neumann's last laugh... The 'Age of Easy Money' is over... Real investing is possible once again...

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When a normal company files for bankruptcy, it's a somber event...

But WeWork isn't a normal company.

In last Friday's Digest, we discussed WeWork's impending bankruptcy. And as we suspected, the coworking-space operator filed for Chapter 11 bankruptcy protection on Tuesday.

And it did so in a very WeWork way...

The company announced the bankruptcy filing in a press release. And as part of the statement, WeWork CEO David Tolley channeled his inner Adam Neumann with this gem...

It is the WeWork community that makes us successful. Our more than half-million members around the world turn to us for the best-in-class spaces, hospitality, and technology that our 2,500 dedicated employees and valued partners provide. WeWork has a strong foundation, a dynamic business, and a bright future.

Successful...

Best-in-class spaces, hospitality, and technology...

Strong foundation, a dynamic business, and a bright future...

Because nothing says all those things like going bankrupt.

If a truly successful company combined best-in-class offerings with a strong and dynamic business, it would have a bright future. But we've learned that WeWork isn't that company.

Perhaps Tolley is a lot wittier than I (Dan Ferris) am giving him credit for, though...

Maybe he's really trying to blame WeWork's failure on "the WeWork community." And with his canned quote in the company's public statement, he's just being really snarky about it.

Heck, I wish I had thought of that approach first...

I've made a fair share of mistakes in my life. But apparently, I've handled them all wrong.

I was always too focused on apologizing, becoming overwhelmed with regret, and thinking about how I would avoid making similar mistakes again. You know, what most folks do.

But I should've celebrated what made me so successful before my mistake. And then, I should've found a snarky way to blame my failure on everyone around me – my community.

After all, to paraphrase Tolley... It is the Dan Ferris community that makes me successful (or not).

In the end, I couldn't do that...

You see, I'm not like Tolley, Neumann, and the other decision-makers at WeWork. I don't have a big enough brain to recognize abject failure as success in the first place.

Of course, measuring whether a company is 'successful' or not is subjective...

WeWork was successful at lighting tens of billions of dollars in investor capital on fire over the past several years. But it was not successful at earning an actual return on that capital.

Tolley wasn't the only person with ties to WeWork to mention the company's name and the word "success" in the same breath. In fact, the other person talked about its future success...

Neumann issued his own statement on Monday, just before WeWork's bankruptcy. In it, the company's tequila-and-weed-loving potential candidate for president of the world said...

As the co-founder of WeWork who spent a decade building the business with an amazing team of mission-driven people, the company's anticipated bankruptcy filing is disappointing. It has been challenging for me to watch from the sidelines since 2019 as WeWork has failed to take advantage of a product that is more relevant today than ever before. I believe that, with the right strategy and team, a reorganization will enable WeWork to emerge successfully.

Now, let me clarify a few things about Neumann's leadership...

Just before his ouster in late 2019, the business he "spent a decade building" was losing $219,000 per hour. And in 2018, his last full year as CEO, WeWork's revenue and losses both doubled.

It's not supposed to work that way.

When revenue goes up, losses are supposed to shrink. Then, one day, after the business gets big enough, it's supposed to become profitable by spreading relatively less expenses over a much larger revenue base.

Technically speaking, WeWork's losses started shrinking after Neumann's departure...

The chart below shows WeWork's reported losses since 2019 (the company's earliest public financial data). And overall, you can see that its losses were trending lower over time...

But I said "technically speaking" for a reason...

You see, before its bankruptcy, WeWork last reported earnings for the quarter that ended on June 30, 2023. At the time, the company's trailing 12-month losses totaled $1.6 billion.

That's a lot less than the company's $3.3 billion in losses in 2019. But it's still enormous.

So it might seem at first that WeWork just needed a longer runway to become profitable. But with such enormous losses, it might've never gotten there. And even if it emerges from bankruptcy and achieves sustainable profitability one day, it will probably always be a mediocre business.

I mean, the company rents office buildings for 10- to 20-year periods. And then, it leases the space to tenants for as short as a month at a time.

That doesn't sound like a "dynamic business" with "a bright future" to me.

If I were a billionaire looking for a startup and someone told me about WeWork's business model...

I would've told them to stop talking.

I'm not saying it can't work. I'm just saying it's a super-risky business model.

And we found out this week that WeWork couldn't keep juggling that risk any longer...

Now the company is trying to stay alive by wiping out its stockholders, negotiating with its debtholders in bankruptcy court, and trying to get out of its building leases.

I do see one ray of light for WeWork...

The "work from home" trend of the past few years has crushed office rents and values. They're down so much that we might be near a bottom in that market.

Many great properties across the U.S. are now selling at dirt-cheap prices. An iconic office building in San Francisco that sold for $64 million in 2018 just sold again for $15 million.

I won't say owning that building is a slam-dunk investment. But it sure looks like a bargain.

And when deals like that are happening, it's not crazy to suggest that WeWork's bankruptcy could be a signal that the office-building market is nearing a meaningful bottom.

I'm not in a hurry to test that thesis with real money. But it's the sort of thing you see when markets are transferring the last bits of misallocated capital from weak to strong hands.

To me, the most disgusting thing about the WeWork saga is that everyone lost except Neumann...

He's still a billionaire.

Neuman cashed out of WeWork in the fall of 2019. When the company went public in 2021, the Bloomberg Billionaires Index estimated his net worth at about $2.3 billion.

About one-third of that total was in WeWork's shares – which have obviously been crushed since then. So according to Bloomberg, he's worth about $1.7 billion today.

Neumann's cash-out included at least one clever move...

Japan-based venture-capital firm SoftBank, WeWork's biggest shareholder, agreed to "lend" $432 million to Neumann in the deal. But instead of getting paid back in cash, SoftBank said it would take WeWork shares – whatever their value might be.

It was a thinly veiled scheme in which Neumann effectively exchanged shares of a money-burning company for a $432 million cash payment from SoftBank. He's not on the hook to pay that amount back in cash.

In the cash-out deal, Neumann also sold $578 million worth of shares held by his company We Holdings to SoftBank. (SoftBank sounds dumber with every sentence I write.) He earned an additional $185 million for signing a non-compete agreement. And finally, he got $106 million to settle a lawsuit.

Make no mistake, Neumann was incredibly lucky to get ousted back in 2019. He left the company before the COVID-19 pandemic lockdowns wrecked all hope for its business.

That's why he got a lot of this cash...

Neumann made it impossible for the board of directors to let him keep his job.

If he had kept his job and still held most of his net worth in WeWork's stock, he would've gotten wiped out. But instead, his sketchy behavior paid off...

He's still a billionaire. And everyone else connected to WeWork lost.

Neumann didn't make money by creating a profitable business that will likely generate a good stream of cash profits for investors while providing a valuable service for customers.

Rather, Neumann got rich by cashing out while everyone else was still chasing absurd future expectations...

Neumann is like the few lucky folks who managed to sell GameStop (GME), AMC Entertainment (AMC), or any other "meme stock" near the top of their rapid, massively speculative surges.

I have nothing against luck in the financial markets. But I doubt anybody would look at Neumann today and say, "He deserved to get rich. I need to learn his business secrets."

Bloomberg columnist Matt Levine summed up Neumann's "success" yesterday...

Adam Neumann really did figure out how to make money. He figured out maybe the best and funniest way anyone has ever made money in the history of capitalism, which is "act crazy around [SoftBank CEO] Masayoshi Son until money spews out of him." Figuring out how to rent out office space for more than you pay for it has absolutely nothing to do with it.

That's apparently the formula for success – act crazy and get investors to spew money at you...

In that way, Neumann is like the crazy financial markets after 15 years of mostly zero interest rates. And Son is the archetypal cash-spewing investor who thrived during that era.

Few investors succeeded in the speculative run to the market's peak in late 2021 and early 2022 by understanding good businesses and knowing how to value them. Instead, many folks found brief success by just being like Son – always looking to throw money at the next insane WeWork-like idea, which was hopefully led by someone (or some idea) like Neumann.

So many folks were like Son in the post-pandemic surge...

They bought worthless crypto assets and cash-burning companies that would've never likely gone public at all in less frothy times. They looked for the worst garbage in the market (like the "meme stocks"). And they held onto everything like it was Berkshire Hathaway.

The market did its crazy, drunken dance. And these folks just kept spewing money at it.

But the same thing always happens eventually...

All the crazy stuff that caused investors to spew money out of their brokerage accounts finally blew sky-high over the past two years. And then, it came crashing back to Earth.

Most of the folks who found that brief success have likely already suffered massive losses...

But they're in for more pain if they don't shake off the Son-Neumann, crazy investor-market paradigm as soon as possible. If they can't, the next few years will totally wipe them out.

It's a perfect encapsulation of the "Age of Easy Money"...

When money is that cheap and comes that easy, folks will throw it at any insane idea in the financial markets. The more outlandish the promise and the grander the vision of the primary promoter of any given scheme, the more he and his mediocre (and often worthless) venture can get away with before it all falls apart.

By outlandish promise, I mean something like WeWork's "mission statement" – which we talked about in last Friday's Digest...

Our mission is to elevate the world's consciousness.

That reminds me of a graphic from another money-burning company in the Age of Easy Money...

I'm talking about Peloton Interactive (PTON).

Now, I've poked fun at the exercise-equipment maker's pre-IPO filings before in the Digest. But it's so much like WeWork's nonsense that I can't resist reprinting it four years later.

Back then, Peloton claimed that one of the most cyclical, fad-driven, mediocre businesses on the planet wasn't just something else. Instead, it believed it was everything else...

Here's the thing, though...

Peloton was – and still is – none of those things. It's just an exercise-equipment company.

Adding workout video subscription services to a mediocre business can't turn a treadmill into an iPhone. And zero-percent interest rates and ethereal mission statements can't turn office buildings into iPhones, either.

And yet, during the Age of Easy Money, far too many investors fell for stories like those. They bought into the promise of magical transformations of mundane goods and services into revolutionary products that transform billions of lives and make investors a fortune.

I tried to warn anyone who would listen about WeWork and Peloton...

Longtime Digest readers know that I sounded the alarm about both companies before they went public. Again, I first wrote about Peloton in September 2019. And my first warning about WeWork came around the same time.

I hope you remembered those essays and avoided falling into their traps...

WeWork is bankrupt. And with so much debt, stockholders will be wiped out.

Peloton went public at $29 per share in September 2019 (when WeWork's first IPO attempt failed). Like many highly speculative stocks, it peaked in January 2021 at $167 per share.

It's around $4.40 per share today. That's 97% below its peak and 85% below its IPO price.

Here's the scariest part of everything we've talked about today...

When interest rates go to zero and people who've saved money are punished with virtually zero return on their hard-earned capital, speculation runs wild. Folks desperately scramble to find the fastest ways to make the highest-possible returns on their capital.

But "get rich quick" plans rarely ever work. And eventually, the interest-rate cycle turns...

We're no longer living in the Age of Easy Money. Interest rates recently hit 16-year highs. And it's harder to trick folks into falling for magical transformation stories.

So money-burning companies like WeWork are going bankrupt. And others like Peloton are getting crushed in the stock market.

It's time to forget what worked during the Age of Easy Money. That era is now over.

What will work for the next decade or two will likely be a lot less crazy...

Instead of being optimistic about cash-burning companies with mediocre business models, you'll need to learn to be optimistic about capital-efficient, cash-gushing businesses. You'll need to start looking for good management teams and excellent financial performance.

You'll need to go back to all the tried-and-true investment principles that seemed boring during the Age of Easy Money. I'm talking about the basics – like patience, mindful analysis, and allocating capital to good businesses instead of just allocating it to the best stories.

All that stuff is about to get a lot more exciting. And even if it's still not that exciting, well... at least it won't cause you to lose 80% or more of your money like WeWork, Peloton, and so many other hyped-up magical-transformation stories did over the past couple years.

Likewise, folks like Neumann who are long on stories and short on ways to consistently earn high returns on investor capital will have a much harder job in this new investing era.

The cycle tends to play out every decade or two...

Folks fall in love with fads and speculative hype... quickly make a bunch of money... just as quickly lose it all back... then either start studying what real investing is about or leave the market for 10 years or more... then come back for the next manic, speculative bull market.

Fortunately, as investors, we can get outside that cycle. To do that, we need to stay focused on the value of great businesses and their ability to compound wealth over the long term.

It was essentially impossible for many folks to do while interest rates were at or near zero.

But now that rates are back in normal territory, real investing is possible once again.

New 52-week highs (as of 11/9/23): CBOE Global Markets (CBOE) and O'Reilly Automotive (ORLY).

In today's mailbag, subscribers write in about Ten Stock Trader editor Greg Diamond, who wrote to you the past two days here and here. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

And as a reminder, Greg is going public with his latest market prediction on Tuesday, November 14. We urge you to make time to listen...

After all, Greg called both the "top" and "bottom" in 2022. And he called for a rally into this year as well.

Now, he says a rare market event is coming in early 2024 that will catch most investors off guard. He doesn't want you to be one of them. And he has a game plan to navigate what he believes is coming.

Greg's event is free to watch. We just ask that you register in advance...

You can sign up here. When you do, you'll get a pair of free bonuses – a brand-new report titled, "3 Stocks to Trade Right Now" and access to a proprietary stock-rating tool you can experiment with leading up to Greg's presentation next week.

Now, here's the feedback we mentioned above...

"Greg explains the technical charts in an understandable manner. The best takeaway is keeping your investment strategy simple, 'keeping your eyes on the basket.' I have used the trades to generate income and protection strategy." – Subscriber John C.

"I like Greg's notion, via [Stanley] Druckenmiller, of diversification being a dirty word." – Subscriber Gary S.

"I've been a subscriber of Greg's service from the start and he's a straight shooter, people seem to often look for a guru and then get disappointed when they find out that that person is still human!

"Greg plays the long game in an area of the market that is obsessed with short-term gains, and he has a system that to many of us on the outside looks like an art form instead of a science, but it works, and he has proven it year after year.

"But let me stress, this service is not about a quick buck, even if that happens every now and then. I love your work, Greg, thank you." – Subscriber Angelo C.

Good investing,

Dan Ferris
Eagle Point, Oregon
November 10, 2023