In 2010, while the financial crisis was still unwinding, I traveled down to Tampa with my wife to visit her family. On a back road not far from our hotel was a recently built housing complex. These were beautiful, low-rise brick buildings, with landscaped lawns and tile roofs that reminded me of Florence.
The sign out front read:
2,000 square feet, 3 bedroom, 3 bathroom condos.
Starting at $
$120,000 or best offer.
I turned to my wife and said that we are moving to Tampa.
For the price of a one bedroom in New York City we could have 27 bedrooms, 27 bathrooms, and 9 kitchens. Our own Versailles!!
I often think of this Tampa measuring stick. It is a reminder that there is a world outside of NY and SF where buyers are scarce. Let’s call this the “Real World”. In the real world there aren’t 47 people showing up at every open house and making all cash bids.
Someday I want to host a TV show called “The Price is NOT Right” where Midwesterners like me guess how much menu items cost at NY restaurants. My favorite is the $7.50 toast (and yes, it is just toast) on the breakfast menu at E.A.T.
But that is small potatoes.
This past week in New York a Francis Bacon painting sold at auction for $142MM. It is an oil painting on canvas, painted 44 years ago. My wife has a Masters in Art History and, after a long explanation of the importance of the artwork, she told me that the price is crazy.
Paintings are not income-producing assets, so the only reason a painting is worth $142MM is that someone is willing to pay $142MM for it. The art market is tricky. Sometimes buyers lose interest in an artist for no apparent reason and values take a nosedive.
Earlier this week Snapchat turned down an offer from Facebook for $3BN. Like the Francis Bacon painting, Snapchat is not an income producing asset (at least not yet). I consider myself an expert in valuing start-up companies and I am struggling to figure this one out.
I have recently heard a new rationale for valuation. It goes like this: “Google will pay billions for this company. Just look at Waze.” You can also substitute Facebook for Google and Instagram for Waze. Whenever I hear this it reminds me of the Francis Bacon painting.
This leads me to one final thought: If a company doesn’t make money, is it art?