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SoftBank

SoftBank will win WeWork bet in Starbucks style: Bernstein

Analyst says valuation is justified in the long term

WeWork needs to follow the Starbucks model, Bernstein says. (Photo by Yuki Kohara)

NEW YORK -- As SoftBank Group continues to grapple with the WeWork hot potato, one group of analysts believe the multi-billion investment write-down -- and public embarrassment -- from the coworking company's fallout may eventually be worth it.

"We believe WeWork's valuation is justified if you believe in the long-term, 'office space' will be a managed service outsourced to professionals -- and that WeWork will be the leading global player," a group of Bernstein analysts led by Chris Lane opined in a Friday research note.

The analysts, who said media and investors are too "fixated" on ballooning losses that came hand in hand with rapid expansion, compared the coworking startup's business to that of Starbucks, in that it could achieve similar brand effects and capitalize on economies of scale.

While profits from each individual Starbucks outlet are limited, the coffee chain makes sense as a corporation because it operates tens of thousands of stores, the research note said. This gives Starbucks a set of advantages including favorable prices from suppliers.

Likewise, by scaling WeWork could lower costs in design, furniture, as well as acquire more data insights to optimize operations, the analysts argued.

"Just like there are a number of Starbucks outlets in key locations of every global city, so will there be a number of WeWork locations," the report said. "This doesn't mean there won't be copycats … but this was the reason they are trying to expand so fast.”

The Bernstein analysts acknowledged the risks inherent in WeWork's business model, which involves being long on leases with landlords but flexible with tenant subscriptions. But they said, "this is no different to hotels," another business where the economics are highly sensitive to capacity utilization, and that the risks can be managed.

In October, SoftBank handed out a $9.5 billion rescue package to the coworking company in exchange of 80% of equity, after WeWork parent We Co.'s botched listing this fall. The startup's valuation, once pegged at $47 billion, has taken a nosedive to less than $10 billion.

The Japanese conglomerate also appointed its very own Marcelo Claure, a former chief executive of telecom carrier Sprint, as chairman of the coworking startup in a bid to turn it around.

Despite financial woes and growing skepticism about its model, WeWork this week announced a record 52 new buildings in cities across the world in December, with plans to open more by year-end.

Bernstein's team of analysts estimate the break-even occupancy rate for each WeWork site to be 64%. They also observed that WeWork's monthly membership rate, in the hundreds of dollars, far exceeds what Microsoft, SalesForce or other software-as-a-service providers are able to achieve.

"Over the last 50 years, more and more corporate services have been deemed 'non-core' by corporates and outsourced to smaller, cheaper providers who have been able to specialize and develop unique capabilities," the research note said. "We see no reason why office space is not ready for a similar transformation."

Despite the huge embarrassment WeWork has been for SoftBank this year, Bernstein concluded, "we suspect SoftBank will have the last laugh when they bring the company back to market in a few years -- bigger and profitable."

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