Am I the only one getting sick of references to some new company being the Uber of this or the Airbnb of that? It’s the Uber of tired metaphors.
Not to say that the sharing economy isn’t an amazing thing. But not every sharing economy solution will be naturally monopolistic in nature. And not every upstart will deserve a multi-billion dollar valuation.
A case in point—last week Fidelity and a few other investors pumped $400m into a private company called WeWork Companies Inc., valuing the whole company at around US$10bn.
WeWork has been described as the, wait for it, Uber of shared office space. It takes medium and long term leases on office space in places like Manhattan, fits them out and then rents them to individuals, small organisations and geographically mobile workers on shorter term leases.
The company and the financial press seem to think that what WeWork does is as revolutionary as what Uber has done to private transport. I have my doubts.
What Uber has done has been genuinely revolutionary, it has first mover advantage and the business has substantial network effects. It’s a winner-take-most business, and Uber will likely dominate its business in most geographic markets for a long time.
In contrast, the shared office sector has been around for decades. In the past, the Forager Australian Shares Fund has owned the global number two player, Australian-basedServcorp. And more recently I’ve done a lot of work on the industry’s 800-pound gorilla, UK-listed Regus plc, as a potential International Fund idea, although we don’t own the stock.
WeWork might bring some fresh ideas to the sector—it’s probably better defined as a co-working space than a shared office space (the distinction relates mainly to the density of beards). They even offer free beer on tap. Base pricing seems reasonable, at least at first glance. Apps and online systems give tenants the opportunity to connect.
But there’s plenty of competition, and not just the Servcorps of this world. I’m writing this from my office in Vienna, a single-site co-working space owned by two brothers and a third friend. The beer costs me €2 but the meeting rooms and ping pong are both free. I can use the office social network to message anyone in the building, order lunch and find someone to play table tennis against. There are dozens of similar alternatives in this small city.
If WeWork decides to set up in Vienna, I won’t even consider it—that need has already been met. That makes WeWork very different from Uber.
The problem isn’t really in the concept but the price—there’s a lot of promise in a $10bn price tag. WeWork currently controls around 3.5m square feet (325,000 square metres) of office in 43 individual locations, mainly in major US downtown areas. That’s a total area of about 1.55 times the size of the Empire State Building. Its $10bn valuation would buy three or four Empire State Buildings outright. And remember, it doesn’t own the real estate.
An even starker comparison is against the global leader in shared offices. WeWork’s $10bn valuation buys 43 centres, around $232m per centre. Regus’s ₤2.6bn (US$4.1bn) enterprise value buys 2,269 centres, or US$1.8m per centre. That’s a valuation differential of 130 times.
Now the typical WeWork centre is different from the typical Regus office, bigger and cooler for starters. But if an apple is selling for 130 times the price of an orange, I’m not buying the apple.
WeWork could, possibly – just maybe – grow into its $10bn valuation. It would need to grow incredibly quickly for a very long time. It would need to manage that growth very, very well. It needs competitors to sit pat, unable to replicate. It needs landlords to not put the squeeze on rents. It needs tenants to really, really love the offering for the price paid. It needs no repeat of the financial crisis.
More likely, though, Fidelity’s punt will prove the Uber of dumb investments.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.