After its failed initial public offering (IPO) in 2019, WeWork will now be going public via a Special Purpose Acquisition Company (SPAC). The deal values the firm at around $9 billion, a fraction of the $47 billion valuation that was achieved two years ago.

The company’s business model is simple – WeWork rents buildings and subleases the space to tenants at a higher rate. WeWork’s downfall in 2019 was as a result of its attempt to masquerade as a technology company whilst providing little indication on how it would achieve profitability at a later stage.

WeWork’s new CEO Sandeep Mathrani, a real estate veteran who has spent time as CEO at other real estate groups such as Brookfield Properties and General Growth Properties, appears to have doubled-down on the company view that WeWork is a tech firm, calling it a “worldwide technology platform”.

But he has gained credibility amongst investors by placing a greater focus on costs whilst divesting a number of previous acquisitions made under Neumann’s tenancy.

Cutting capital expenditure and improving margins will be essential if the company is to be self-sustaining in the future and not reliant on raising external funding to stay afloat.

WeWork’s SPAC is thought to unlock around $1.3 billion in cash, which will assist with operating expenses, given that the company is still heavily loss-making. WeWork posted a $3.2 billion loss in 2020, a slight improvement from the $3.5 billion loss it made in 2019.

But Mathrani is forecasting strong demand for shared office space in a post-Covid world, fuelled by his expectation that many companies will still require some flexible working space despite choosing to get rid of their offices and allowing employees to work from home part-time. Whether this trend materialises or not is the multi-billion-dollar question for WeWork.

The SPAC prospectus forecasts WeWork to achieve positive “adjusted” earnings before interest, tax, depreciation and amortization (EBITDA) by 2022. This adjusted EBITDA measure strips out costs such as those associated with acquisitions and divestments. The cost of divesting previous failed acquisitions is likely to drag on GAAP earnings for years to come, then.

While the loss-making nature of the business makes it difficult to value WeWork from an earnings perspective, sales could be used to gauge whether a $9 billion valuation is sensible.

A $9 billion valuation appears far more achievable than the $47 billion price tag that was floated in 2019, but still represents a premium over its key competitor IWG who owns brands such as Regus and Spaces.

This is largely down to WeWork’s expectations that it will grow revenue at a faster rate. Sales are projected to climb by an annualised rate of a 21.4% for the next four years.

A major risk for WeWork is a turn in the property market. WeWork takes out long-term leases on its properties and generally has shorter-term contracts with its tenants. If property prices and market rents were to fall, its tenants could demand lower rents, thus creating a further mismatch between revenue and costs.