Stratechery analysis of the WeWork IPO

Ben Thompson of Stratechery wrote an analysis of the WeWork IPO.

« WeWork’s offering transforms real estate into a variable cost for all kinds of companies, with benefits that roughly mirror public clouds. »

« From the S-1… When applying our average revenue per WeWork membership for the six months ended June 30, 2019 to our potential member population of 149 million people in our existing 111 cities, we estimate an addressable market opportunity of $945 billion. Among our total potential member population of approximately 255 million people across our 280 target cities globally, we estimate an addressable market opportunity of $1.6 trillion. »

« Did you catch that? WeWork is claiming nearly every desk job around the globe as its market, a move that by definition means moving beyond being a real estate company. »

On recession risk:

« What happens when the economy is shrinking and those long-term leases are not going anywhere, while WeWork customers very well may be? This is a fair concern and almost certainly the largest reason to be skeptical of WeWork in the short run, but the company does have counter-arguments:

• First, WeWork argues that in a downturn increased flexibility and lower costs (relative to traditional office space) may in fact attract new customers.
• Second, WeWork claims its growing enterprise customer base has nearly doubled lease commitments to 15 months with a committed revenue backlog of $4.0 billion; this is still far shorter than WeWork’s mostly 15-year leases, but perhaps long enough to stabilize the company through a recession.
• Third, WeWork notes that a recession — provided the company has sufficient capital — would actually allow it to accelerate its buildout as lease and construction costs come down. »

Additionally, the leases are held by subsidiary LLCs, limiting landlords’ recourse to the parent company.

On governance red flags:

« The tech industry generally speaking is hardly a model for good corporate governance, but WeWork takes the absurdity an entirely different level. For example:

• WeWork paid its own CEO, Adam Neumann, $5.9 million for the “We” trademark when the company reorganized itself earlier this year.
• That reorganization created a limited liability company to hold the assets; investors, however, will buy into a corporation that holds a share of the LLC, while other LLC partners hold the rest, reducing their tax burden.
• WeWork previously gave Neumann loans to buy properties that WeWork then rented.
• WeWork has hired several of Neumann’s relatives, and Neumann’s wife would be one of three members of a committee tasked to replace Neumann if he were to die or become permanently disabled over the next decade.
• Neumann has three different types of shares that guarantee him majority voting power; those shares retain their rights if sold or given away, instead of converting to common shares. »