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DCF based valuations are only as good as your assumptions. If you drink the koolaid, as this analyst clearly has, your optimistic assumptions make your valuatio

DCF based valuations are only as good as your assumptions. If you drink the koolaid, as this analyst clearly has, your optimistic assumptions make your valuations meaningless. As support for this, I’ll point out that Warren Buffett refuses to look at a companies stock price before he’s finished his valuation analysis just to ensure that his love for a business doesn’t bias his valuation to ensure he can buy it. Her “analysis” is just a smattering of positive events and suppositions, and she doesn’t address any he Elephant in the room. How can a renter make a profit by marking up the office space owned by real landlords? How go they prevent the landlords from simply repurposing their excess office space to directly compete with WeWork, without its overhead?

edmundsauto 6y ago
Perhaps the key is small scale. The hope is enterprises acting as franchisees won’t want to be in the landlord business, and would rather just take a haircut. Possibly, we work could be more efficient at tenant services, paying for some of their cut by increasing the pie. The power of the network is also valuable as mentioned with the bit about the all access passes. I still think it’s too rosy, but if we work can reset expectations that it’s a real estate company with those margins, and it’s valued low enough, maybe it makes sense.
xyzzy123 6y ago
> How can a renter make a profit by marking up the office space owned by real landlords I think there are a lot of plausible ways this can happen. The core idea I think is, it's like colo/dc vs aws. Both make sense in different circumstances. Higher pricing for flexibility, elasticity - avoiding lock-in while scaling up or down (maybe to 0) or moving location. Price transparency. Network effects, brand recognition, standardised services and high quality "overlays" to spaces like wifi, printers and presentation equipment that works everywhere. Social networks - in physical space, and improved discoverability of spaces themselves and related business clusters. There is also a scale play where you get big enough as an intermediary to beat up suppliers - because you can control and direct demand. Usually a landlord gets to extract surplus value from a location but as WeWork's overlays / brand / network grow powerful they have a stronger negotiating position. Consider the situation where WeWork is huge, and having one near other properties you own (housing, food, retail, etc) raises the value of those. You could take this further and who knows if WeWork will be the ones to do it, but there are definitely value improvements to be had over "negotiate with an agent and commit to an n-year lease, then do a fit-out". Serviced offices are a thing but scaling that idea _could_ be something else again.
- bananaface 6y ago
  I don't understand how having a wework near your restaurant would increase the value more than any other office. Either way the value add is a nearby space filled with professionals. Why would the wework brand increase that?
  - xyzzy123 6y ago
    Good call-out, that point is not well thought through or supported. My mental model was demographics. As an example, Apple users are "more valuable" than Android users. Not in any absolute or moral sense of course, just in terms of average propensity to blow money on things. In a bifurcated economy not all office occupants are equal value. When I wrote that I had a model in mind where: Your average WeWork occupant is more likely to be young, mobile, well-paid, renting an apartment, eating out, preferring "services" over owning things, and so on. WeWork will be interested in tracking those demographics in ways that regular office lessors aren't, meaning they can tell that story and quantify the value they bring. It's not a strong point (and it's a little sickening) but I think the rest of the argument stands.
totalZero 6y ago
> Warren Buffett refuses to look at a companies stock price before he’s finished his valuation analysis just to ensure that his love for a business doesn’t bias his valuation to ensure he can buy it. Those aren't exactly his words; he says he doesn't get any information about the company from the stock price itself, and would rather develop an idea of the valuation and then compare it to the stock price. https://youtu.be/BjSMeGprrkw?t=154 https://youtu.be/BjSMeGprrkw?t=154 To be fair, maybe he said it differently in another interview or talk.
- valuearb 6y ago
  His entire philosophy is the market is only imperfectly efficient, so prices may or may not reflect actual value. Determining actual value is an estimation process, so he works very hard to avoid bias. An example is he comes across a company with an excellent business model, that he would like to own. If he knows it’s trading at $10, when he does his DCF analysis he will need a valuation over $15. When he makes key DCF assumptions (growth rate, profitability, margins, lifetime of competitive barriers, etc) he is also subconsciously rooting for that > $15 result. It’s too easy to say, well normally I don’t think growth rates this high can last that long, but in this case the company is unique and special, so I’ll give it higher growth prospects than I usually find prudent, etc. Go read his shareholder letters, you can find them back to the mid-70s online (and Buffett partnership letters back to mid 50s), and he often discusses his efforts to avoid bias (sunk cost fallacy, Mr. Markets influence, etc).
busterarm 6y ago
Honestly, I've seen so much glowing praise about WeWork in the financial press all year that several times I've questioned (even on here) how much of it is paid for. It simply does not make sense to me, for several reasons including the ones that you raised. It's such a common sense thing to me that WeWork would stuggle in a market abundant with vacant office space. I almost feel like I'm shouting that the Emperor Has No Clothes. ---- What makes everyone think that corporate landlords facing unfathomable vacancies won't be able to hyper-aggressively compete with WeWork on short-term leasing, internet and amenities for tenants? They have much more leverage than WeWork does in terms of floor construction/reconfiguration costs. In such an environment, WeWork would not be able to lease and make money and would likely have to transition more of its portfolio to owned-properties, slowing its growth and subjecting the company to more risk... Companies like Convene are much better suited to what's coming than WeWork is as suitable meeting space is likely to come at a premium.

edmundsauto 6y ago

Perhaps the key is small scale. The hope is enterprises acting as franchisees won’t want to be in the landlord business, and would rather just take a haircut. Possibly, we work could be more efficient at tenant services, paying for some of their cut by increasing the pie. The power of the network is also valuable as mentioned with the bit about the all access passes. I still think it’s too rosy, but if we work can reset expectations that it’s a real estate company with those margins, and it’s valued low enough, maybe it makes sense.

xyzzy123 6y ago

> How can a renter make a profit by marking up the office space owned by real landlords I think there are a lot of plausible ways this can happen. The core idea I think is, it's like colo/dc vs aws. Both make sense in different circumstances. Higher pricing for flexibility, elasticity - avoiding lock-in while scaling up or down (maybe to 0) or moving location. Price transparency. Network effects, brand recognition, standardised services and high quality "overlays" to spaces like wifi, printers and presentation equipment that works everywhere. Social networks - in physical space, and improved discoverability of spaces themselves and related business clusters. There is also a scale play where you get big enough as an intermediary to beat up suppliers - because you can control and direct demand. Usually a landlord gets to extract surplus value from a location but as WeWork's overlays / brand / network grow powerful they have a stronger negotiating position. Consider the situation where WeWork is huge, and having one near other properties you own (housing, food, retail, etc) raises the value of those. You could take this further and who knows if WeWork will be the ones to do it, but there are definitely value improvements to be had over "negotiate with an agent and commit to an n-year lease, then do a fit-out". Serviced offices are a thing but scaling that idea _could_ be something else again.

bananaface 6y ago
I don't understand how having a wework near your restaurant would increase the value more than any other office. Either way the value add is a nearby space filled with professionals. Why would the wework brand increase that?
- xyzzy123 6y ago
  Good call-out, that point is not well thought through or supported. My mental model was demographics. As an example, Apple users are "more valuable" than Android users. Not in any absolute or moral sense of course, just in terms of average propensity to blow money on things. In a bifurcated economy not all office occupants are equal value. When I wrote that I had a model in mind where: Your average WeWork occupant is more likely to be young, mobile, well-paid, renting an apartment, eating out, preferring "services" over owning things, and so on. WeWork will be interested in tracking those demographics in ways that regular office lessors aren't, meaning they can tell that story and quantify the value they bring. It's not a strong point (and it's a little sickening) but I think the rest of the argument stands.

totalZero 6y ago

> Warren Buffett refuses to look at a companies stock price before he’s finished his valuation analysis just to ensure that his love for a business doesn’t bias his valuation to ensure he can buy it. Those aren't exactly his words; he says he doesn't get any information about the company from the stock price itself, and would rather develop an idea of the valuation and then compare it to the stock price. https://youtu.be/BjSMeGprrkw?t=154 https://youtu.be/BjSMeGprrkw?t=154 To be fair, maybe he said it differently in another interview or talk.

valuearb 6y ago
His entire philosophy is the market is only imperfectly efficient, so prices may or may not reflect actual value. Determining actual value is an estimation process, so he works very hard to avoid bias. An example is he comes across a company with an excellent business model, that he would like to own. If he knows it’s trading at $10, when he does his DCF analysis he will need a valuation over $15. When he makes key DCF assumptions (growth rate, profitability, margins, lifetime of competitive barriers, etc) he is also subconsciously rooting for that > $15 result. It’s too easy to say, well normally I don’t think growth rates this high can last that long, but in this case the company is unique and special, so I’ll give it higher growth prospects than I usually find prudent, etc. Go read his shareholder letters, you can find them back to the mid-70s online (and Buffett partnership letters back to mid 50s), and he often discusses his efforts to avoid bias (sunk cost fallacy, Mr. Markets influence, etc).

busterarm 6y ago

Honestly, I've seen so much glowing praise about WeWork in the financial press all year that several times I've questioned (even on here) how much of it is paid for. It simply does not make sense to me, for several reasons including the ones that you raised. It's such a common sense thing to me that WeWork would stuggle in a market abundant with vacant office space. I almost feel like I'm shouting that the Emperor Has No Clothes. ---- What makes everyone think that corporate landlords facing unfathomable vacancies won't be able to hyper-aggressively compete with WeWork on short-term leasing, internet and amenities for tenants? They have much more leverage than WeWork does in terms of floor construction/reconfiguration costs. In such an environment, WeWork would not be able to lease and make money and would likely have to transition more of its portfolio to owned-properties, slowing its growth and subjecting the company to more risk... Companies like Convene are much better suited to what's coming than WeWork is as suitable meeting space is likely to come at a premium.