Long
WeWork: Forgotten But Not Out
Each Wednesday, we publish an idea about an interesting, under-the-radar stock that we think has long term potential and deserves a little attention. This week, we are looking at BBOWX, which is the special purpose acquisition corp looking to bring WeWork public.
For those who aren't familiar with WeWork, it's an office space company that provides flexible and well furnished offices in a subscription format. They take unleased office inventory (of which there is currently a lot), furnish it well, and then offer it to businesses and individuals looking for flexible co-working space. While many are currently bemoaning the situation with regards to Commercial Real Estate ("Remote Forever"), there is actually a lot of upside when it comes to this flexibility.
When I worked at my previous job, I was remote full time. However, the Proprietary Trading Firm I worked for had a long term lease for an entire floor of a skyscraper in Manhattan's Financial District. Without going into too much detail about it, suffice it to say that the company was looking to reduce it's office footprint substantially upon lease expiry. This kind of math is going on across nearly every modern enterprise, and hybrid working will likely start to become the norm. This would have been impossible even a decade ago, but communications infrastructure has gotten good enough to reduce the need for in person collaboration.
WeWork is primed to be a beneficiary of this trend. As more and more companies increasingly need flexibility in their office setups, WeWork is the most logical place to go.
For example, when Discordia Research begins hiring, we will almost certainly have our offices in a WeWork. We have no Real Estate competency, no desire to gain any, and a variable cost is much better on our income statement than a fixed cost; especially in today's quickly changing business landscape. It's the best solution. Additionally, they're just fun to work in, and make attracting talent easier.
I was one of the few who were bullish on WeWork a few years ago at its 49B valuation, and so now getting it at 80% off seems like a steal. As the world continues to come out of this crisis, WeWork is perfectly positioned for the new working dynamics that will be present in society.
Not Sold? Here is the overarching bull case written by Ben Thompson, the man behind Stratechery, one of the best blogs out there, where he talks about the bull case for We Work. You can find the rest here: stratechery.com/2019/the-wework-ipo/
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Imagine it is 2006, and you go to investors with a bold new business plan: computer hardware! Never mind that IBM just sold its PC business to Lenovo a year previously, and that servers appeared on the same path to commoditization, particularly with the emergence of x86 solutions from companies like Dell in place of specialized architectures from traditional suppliers like Sun. It doesn’t sound particularly promising.
And yet 2006 was the year that Amazon launched Amazon Web Services, a computer hardware business that leveraged the commoditization of hardware into a business with operating margins of around 30%. It turned out having one company manage that commodity hardware for everyone else had several important advantages that more than justified those margins:
New companies had instant access to an entire server stack for basically free, because payments tracked usage (which for new companies is zero).
Growing companies did not need to obtain funding for or spend the time on extensive build-outs months or years ahead of future growth, instead they could pay for new capabilities as they needed them.
Established companies no longer needed to have a competency in managing server installations, and could instead focus on their core competencies while outsourcing to cloud providers.
In all three cases the fundamental shift was from servers as capital investment to variable costs; the benefits were less about saving dollars and cents and more about increasing flexibility and optionality. At least, that is, to start: today AWS has offerings that extend far beyond basic compute and storage to capabilities like server-less (which, paradoxically, requires owning an huge number of always-available servers) that are uniquely possible because of AWS’ scale.
AWS, broadly speaking, is the WeWork bull case. Consider the phrase, “fixed cost”. There is nothing more fixed than real estate, yet WeWork’s offering transforms real estate into a variable cost for all kinds of companies, with benefits that roughly mirror public clouds:
New companies can have instant access to a well-appointed office space and pay for only a desk or two, and then grow as needed.
Growing companies do not need to spend time on extensive build-outs months or years ahead of future growth, and instead pay for more space as they need it.
Established companies no longer need to have a real estate competency all over the world, and can in fact expand to new territories with far less risk than previously required.
Note that, just like the public cloud, price is not necessarily the primary driver for WeWork space. Still, there is no doubt that AWS, for example, pays far less for AWS’ underlying infrastructure than any of their customers would pay on their own. For one, AWS can spread the cost of data centers around the world over a huge number of customers; for another AWS can bargain with hardware suppliers or simply design and make its own components.
WeWork can achieve similar gains, to an extent. Within a single location, common space, by virtue of being shared by all WeWork members, can be built out much more than any one member could build out on their own. Similarly, WeWork’s network of locations around the world provide options that accrue to all members.
WeWork has also developed an expertise in utilizing office space efficiently, and while some of this is simply a willingness to cram more people into less space, opening triple-digit locations a year means that the company is by definition learning and iterating on what works for office space far faster than anyone else, and that is before the promised application of sensors and machine learning to the challenge.
And then there is the question as to whether WeWork is, or can become, more than a real estate play at scale: what might be the equivalent of “server-less” when it comes to office space — a unique capability that is uniquely unlocked by one company providing all of the real estate needs for, well, everyone?
"
For those who aren't familiar with WeWork, it's an office space company that provides flexible and well furnished offices in a subscription format. They take unleased office inventory (of which there is currently a lot), furnish it well, and then offer it to businesses and individuals looking for flexible co-working space. While many are currently bemoaning the situation with regards to Commercial Real Estate ("Remote Forever"), there is actually a lot of upside when it comes to this flexibility.
When I worked at my previous job, I was remote full time. However, the Proprietary Trading Firm I worked for had a long term lease for an entire floor of a skyscraper in Manhattan's Financial District. Without going into too much detail about it, suffice it to say that the company was looking to reduce it's office footprint substantially upon lease expiry. This kind of math is going on across nearly every modern enterprise, and hybrid working will likely start to become the norm. This would have been impossible even a decade ago, but communications infrastructure has gotten good enough to reduce the need for in person collaboration.
WeWork is primed to be a beneficiary of this trend. As more and more companies increasingly need flexibility in their office setups, WeWork is the most logical place to go.
For example, when Discordia Research begins hiring, we will almost certainly have our offices in a WeWork. We have no Real Estate competency, no desire to gain any, and a variable cost is much better on our income statement than a fixed cost; especially in today's quickly changing business landscape. It's the best solution. Additionally, they're just fun to work in, and make attracting talent easier.
I was one of the few who were bullish on WeWork a few years ago at its 49B valuation, and so now getting it at 80% off seems like a steal. As the world continues to come out of this crisis, WeWork is perfectly positioned for the new working dynamics that will be present in society.
Not Sold? Here is the overarching bull case written by Ben Thompson, the man behind Stratechery, one of the best blogs out there, where he talks about the bull case for We Work. You can find the rest here: stratechery.com/2019/the-wework-ipo/
-------------
"
Imagine it is 2006, and you go to investors with a bold new business plan: computer hardware! Never mind that IBM just sold its PC business to Lenovo a year previously, and that servers appeared on the same path to commoditization, particularly with the emergence of x86 solutions from companies like Dell in place of specialized architectures from traditional suppliers like Sun. It doesn’t sound particularly promising.
And yet 2006 was the year that Amazon launched Amazon Web Services, a computer hardware business that leveraged the commoditization of hardware into a business with operating margins of around 30%. It turned out having one company manage that commodity hardware for everyone else had several important advantages that more than justified those margins:
New companies had instant access to an entire server stack for basically free, because payments tracked usage (which for new companies is zero).
Growing companies did not need to obtain funding for or spend the time on extensive build-outs months or years ahead of future growth, instead they could pay for new capabilities as they needed them.
Established companies no longer needed to have a competency in managing server installations, and could instead focus on their core competencies while outsourcing to cloud providers.
In all three cases the fundamental shift was from servers as capital investment to variable costs; the benefits were less about saving dollars and cents and more about increasing flexibility and optionality. At least, that is, to start: today AWS has offerings that extend far beyond basic compute and storage to capabilities like server-less (which, paradoxically, requires owning an huge number of always-available servers) that are uniquely possible because of AWS’ scale.
AWS, broadly speaking, is the WeWork bull case. Consider the phrase, “fixed cost”. There is nothing more fixed than real estate, yet WeWork’s offering transforms real estate into a variable cost for all kinds of companies, with benefits that roughly mirror public clouds:
New companies can have instant access to a well-appointed office space and pay for only a desk or two, and then grow as needed.
Growing companies do not need to spend time on extensive build-outs months or years ahead of future growth, and instead pay for more space as they need it.
Established companies no longer need to have a real estate competency all over the world, and can in fact expand to new territories with far less risk than previously required.
Note that, just like the public cloud, price is not necessarily the primary driver for WeWork space. Still, there is no doubt that AWS, for example, pays far less for AWS’ underlying infrastructure than any of their customers would pay on their own. For one, AWS can spread the cost of data centers around the world over a huge number of customers; for another AWS can bargain with hardware suppliers or simply design and make its own components.
WeWork can achieve similar gains, to an extent. Within a single location, common space, by virtue of being shared by all WeWork members, can be built out much more than any one member could build out on their own. Similarly, WeWork’s network of locations around the world provide options that accrue to all members.
WeWork has also developed an expertise in utilizing office space efficiently, and while some of this is simply a willingness to cram more people into less space, opening triple-digit locations a year means that the company is by definition learning and iterating on what works for office space far faster than anyone else, and that is before the promised application of sensors and machine learning to the challenge.
And then there is the question as to whether WeWork is, or can become, more than a real estate play at scale: what might be the equivalent of “server-less” when it comes to office space — a unique capability that is uniquely unlocked by one company providing all of the real estate needs for, well, everyone?
"
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