The WeWork fiasco has cast a dark cloud over Softbank for the better part of 2019. But one Wall Street analyst says Softbank might come on top in the end.
"Despite the huge embarrassment WeWork has been for SoftBank this year, we suspect SoftBank will have the last laugh when they bring the company back to market in a few years - bigger and profitable," Chris Lane, an analyst at Bernstein, wrote in a note to clients on Friday.
The Japanese conglomerate was forced to write down its investment in the office leasing startup in November, which propelled the company's third-quarter losses to almost $6.5 billion.
According to Lane, now that Softbank is in the driver's seat, the emphasis moving forward will be making WeWork's business profitable. The company can do that by pulling back on expansion and filling existing properties, and reducing costs by ditching all non-core businesses, he added.
One of the key risks cited in WeWork's current model is the fact that the company engages in long-term leases with landlords and then essentially subleases to customers who can cancel in a short period of time, Lane said.
But WeWork is making strides to mitigate this risk by targeting corporate customers with longer-term "managed space" deals.
"As of Sep'2019, 43% of revenues are from these arrangements with enterprises with over 1,000 employees, up from 18% in 2016. This we believe is ultimately why SoftBank was attracted to the model," Lane added.
Lane predicts WeWork's valuation could grow to more than $23 billion by the end of 2023. That figure is justified, he argues, if office space transforms into a "managed service outsourced to professionals," a business where WeWork could be a leading global player.
"We think the investment will ultimately prove to be value-creating," Lane said. "Post the restructuring, SoftBank will emerge with 80% of the equity of what we believe remains a very promising business."