Chief Investment Strategist, The Freeport Society
Mark my words. Just like that ridiculous sock puppet from Pets.com came to epitomize the excesses of the late-1990s dot-com bubble, WeWork will become the “What were they thinking?” posterchild of the early-2020s tech stock bubble.
But let me be clear. Compared to WeWork, despite the sock puppet, Pets.com was a reasonable and legitimate business model.
Buying pet food and supplies online is a good idea. A quick search for “dog food” on Amazon returns 265 pages of results. There are literally thousands of products to choose from, and virtually all can be delivered to my house by tomorrow afternoon.
Besides the sock puppet, Pets.com wasn’t stupid. It was just early.
But WeWork… the executive-suite landlord masquerading as a Silicon Valley unicorn? That was just stupid.
So, let’s get into how equally stupid Federal Reserve policy played a part in WeWork’s rise… and how slightly less stupid Fed policy brought about the company’s fall.
Then, let’s put to rest the notion that the failure of WeWork (not a tech company, despite whatever it may have claimed) is somehow an indicator of Silicon Valley’s downfall.
Technological innovations are only speeding up… and the profits investors can make through exponential progress aren’t going anywhere. Finally, let’s consider some companies that truly do display some good, old-fashioned American ingenuity…
It Was Barely Even a Real Estate Company
The concept of the subleased executive suite has been around for ages. I used one myself for over a decade in Dallas, and it was great. I leased a small one-man office, and my rent included access to a conference room, a private phone number and a receptionist, a private mailbox, and even decent coffee.
For my fledgling startup, it was an elegant solution.
Unlike a WeWork suite, my executive sublease didn’t come with free craft beer on tap. And my office had a door. If I wanted to sit in a coworking space with 20 other people, I would have saved the rent money and camped out in Starbucks all day.
Don’t get me wrong: I like craft beer. And I like it better when someone else is paying for it. But beer is something I like after work.
Doubts as to how much “work” actually got done in WeWork suites aside, the company’s business model made no sense.
Why would a “real estate company” that didn’t actually own real estate and only turned a profit by using wildly creative accounting rules ever be worth $47 billion?
Ah, that’s the nail on the head right there, figuratively speaking.
The WeWork magic lay in the hallucinated numbers.
Rather than price WeWork as an office sublessor, which is what it was, Wall Street priced it as a tech unicorn. That’s because the company used newly created accounting metrics, like “community-adjusted EBITDA,” pulled out of the ether.
I can only call this mystical accounting.
Good, old-fashioned EBITDA is earnings before interest, taxes, depreciation, and amortization. Per Warren Buffett, it’s “earnings before all the bad stuff.”
Community-adjusted EBITDA also includes “building and community-level operating expenses,” also known as rent, utilities, internet, and the salaries of building staff.
So, after eliminating virtually all expenses, WeWork was wildly profitable!
And let’s not forget the cultish aspects of the business. WeWork hosted summer camps that founder Adam Neumann presided over. These resembled a mix of a Roman orgy and Burning Man. Part of me is jealous I never went to one. They looked like a rip-roaring good time! But again, it’s hard to see how any of it was conducive to the “work” part of WeWork.
So, why did ostensibly smart people allow themselves to be conned by a cult leader running a real estate subleasing operation masquerading as a tech unicorn?
Hat Tip to the Fed
Because money was free.
Neumann launched WeWork in 2010, after the Federal Reserve had pinned interest rates at zero and committed to buying tens of billions of dollars per month in bonds via quantitative easing. When money is that easily created, it ceases to have value.
Profit – or at least real profit and not community-adjusted EBDITA – doesn’t matter. No need to worry about your money working for you if you can always borrow more at 0% interest.
The Fed’s years-long zero interest rate policy is a prime example of dollar debasement… one of the investing themes we cover at The Freeport Society. A debased dollar begets a debauched business model.
One way to fight against this nonsense and stay one step ahead of the inflation that comes with dollar debasement is to avoid tech charlatans like the ones at WeWork, and invest in the sort of real-deal Silicon Valley disruptors. Companies with viable business models and real profits… rather than the “community adjusted” kind.
Every year, entrepreneurs and other businesspeople start up 3 million to 4 million new businesses in America. Some thrive. Some fail for lack of funding. Most are terrible ideas that should never be started to begin with.
But that’s the beauty of a competitive capitalist economy. Strong startups grow into the large, profitable businesses of tomorrow, employing hundreds, thousands, or even hundreds of thousands of people.
Weaker businesses ultimately fail, making room for the stronger ones to survive. It’s part of the creative destruction that keeps the economy vibrant.
The Fed threw all this out of balance by creating too much credit for far too long. This made possible businesses as asinine as WeWork.
Now that interest rates are higher, we finally see the emperor’s new clothes were a sham all along.
A tight-money economy requires a different mindset.
Quality and financial strength matter.
Actual exponential progress – another key Freeport Society investing theme – matters…
And I believe that Americans have plenty more technological innovation – and tech profits – left in us.
As the Industrial Revolution matured and gave way to the Technology and Computing Revolution, America led the way. We will continue to do so, even as deglobalization deconstructs the world we’ve grown accustomed to.
The question is: Which companies embody the true spirit of American Ingenuity and exponential progress?
I list several of my favorites in my new 5 Best Stocks for 2024 Special Report. I also share the companies to invest in to survive the dollar’s debasement, deglobalization, and several other trends combining to create the age of chaos we’re all now living through.
Click here to download the free report now.
To life, liberty, and the pursuit of wealth.