Snap Inc. finally went public at $17 and is now worth around $26 billion after a meteoric 45% rise in its first day of trading, followed by an unsurprising fall. With ~1,900 employees almost liquid, funny money capital will inevitably rain down on the Southern California ecosystem!
What’s even more exciting is that Snap Inc. was able to sell stock to the public at a trailing 55X revenue multiple with no profits compared to a 14.5X multiple for Facebook and a 4.5X revenue multiple for Twitter today. In other words, investors either really believe in the growth projections for Snap Inc., and/or the scarcity of big internet/tech deals is forcing investors to pay a premium.
Since most of us do not work at Snap Inc., don’t have spouses who work at Snap Inc., nor were we investors in Snap Inc., we won’t benefit directly from their IPO. However, most of us are logical thinkers who can make observations of how to benefit when the 150-day lock-up period is over and capital is recycled into the community.
The most obvious beneficiary of IPO riches is real estate. We’ve all learned firsthand or from story books how paper multi-millionaires lost everything during the 2000 dotcom crash because they couldn’t sell quickly enough or they didn’t buy hard assets. At least once a week while I was working, the guy who made me a breakfast croissant reminded me how he was once worth $3 million.
Staying wealthy for longer is all about turning funny money into real assets. Money will also flow into cars, fine art, entertainment, and other luxury goods as well. But real estate is where the common person can expect to benefit the most.
Real Estate Beneficiaries Of Snap IPO
Besides Venice Beach being the biggest beneficiary of the IPO given that’s where Snap Inc. is headquartered, Marina Del Ray, Manhattan Beach, Hermosa Beach, Redondo Beach, Pacific Palisades, Santa Monica, and Mar Vista should all benefit as well. Once these markets get sufficiently tight, the benefits continue to fan out across the city.
Folks who hold real estate in these areas should stay put and watch their net worth grow so long as there is no great economic crash. Folks who are waiting to buy should start aggressively hunting for their perfect property in the fringes now before the lock-up period expires in Q3 2017.
If you can find a good deal that cash flows positively after a 20% downpayment, and you plan to own the property for the next 10+ years, then you’re probably going to do OK despite the large property price rally since ~2012. Google and Facebook have moved in, turning industrial lots into campuses in nearby Playa del Rey.
What’s very interesting is that according to Zillow, Venice Beach property is only expected to go up by 0.7% over the next 12 months due to plenty of inventory and a 95% surge in the median home price since 2012 ($815K to $1.585M). In other words, the market is COLD in part because many of the locals have already bought up Venice Beach property in anticipation of a Snap Inc. IPO and a recovering economy. However, the Zillow forecast is before the real-time explosion in value we see in Snap Inc’s shares today, and perhaps now there’s an opportunity to “snap up” properties at a discount before prices march higher again.
For investors who don’t live in Los Angeles, the next best way to profit is to scan for real estate crowdfunding deals in the LA area. I’m still bullish on the heartland, but the Snap IPO could very well be the catalyst for another frenzy in coastal real estate markets.
Due to the strength of the Snap IPO, I’m pretty sure my thesis of buying SF Bay Area real estate during the winter of 2017/2018 ahead of the Airbnb and Uber IPOs will become mainstream now. For SF buyers, we’re experiencing a perfect moment where prices on the high end and in the condo market have softened about 5% – 10% since early 2016 due to a large influx of new condo supply. Weakness will probably last until mid-2018, giving us more time to save up, until either one goes public.
Airbnb generated about $1.7B in revenue in 2016 and is expected to grow revenue to $2.8B for 2017. Airbnb is currently raising a new round of funding based on a ~$30-33B valuation. In other words, its revenue multiple is only 10 – 11X compared to Snap’s 55X revenue multiple. Given a rising tide lifts all boats, I’m sure Airbnb’s valuation just ticked up at least 10%. If you assign Snap’s 55X revenue multiple to Airbnb’s 2016 revenue, Airbnb would be valued at a whopping $93.5B! Not gonna happen due to different growth metrics, but it’s fun to extrapolate.
Meanwhile, Uber is even larger, with $5.5B in revenue in 2016 and perhaps $7B+ revenue for 2017. Uber is currently valued at roughly $60 – $66B, or ~10 – 12X trailing revenue. Snap’s IPO probably neutralized all of Uber’s recent negative press with regards to valuations. For fun, if we apply Snap’s 55X revenue multiple to Uber’s revenue, you get a market capitalization of $385B, equal to another Facebook.
Bay Area property went ballistic after the Google and Facebook IPOs, but so has most coastal city property since 2012 due to a recovering economy. Southern California property will likely continue to stay strong post-Snap’s IPO. With ~10,000 new millionaires looking for a home after Airbnb and Uber’s IPO, the Bay Area will likely reignite since less than 1% of the housing stock trades at any given moment. The key is to buy ahead of the liquidity events because although the market discounts in advance, it never fully discounts the true value until the event actually happens. For example, even after a proposed company buyout, there is still a spread between the offer price and the trading price.
For those of you who don’t live in LA or SF, that’s OK. Real estate crowdfunding can at least help you get closer to the frenzy. Just looking at RealtyShare’s platform, here are a couple deals in San Francisco and Los Angeles.
San Francisco Example
Talk about depressing photography for its featured image! This property is located in Cole Valley, a desirable neighborhood within walking distance to the UCSF campus and a 15-minute subway ride to downtown. I’m surprised by the low $5K minimum and short 12-month term paying a healthy 10.5% interest. But perhaps by the time they’re done rehabbing the place, it’ll be just in time to benefit from a big IPO.
This is a typical two-unit San Francisco property I wanted to buy back in 2003 for under a million bucks. The idea was to live in one unit and rent out the other for five years until I saved up enough money. Then I’d rent out both units, buy a larger two unit building, live in one unit, and repeat until amassing at least six rental units generating $250,000 in gross rent while retiring by age 40 in Hawaii! Oh well. My current life will have to do.
I’m intimately familiar with this neighborhood because I live close by and just checked out an amazing rehab several streets down last weekend that is currently pending (picture below). The developer basically did what the current sponsor for the Parnassus property wants to do, and that’s buy a two-unit building, rehab it and sell each unit for a profit.
Check out the comp below. $2,095,000 is for the top unit with a cottage in the rear. The bottom unit is asking $1.79M. Given the unit went into contract after two weeks on the market, it’ll likely sell for more than asking. Once this post is published, I’m off to spend two hours this Sunday looking for more clues as to what’s going on with the property market!
Los Angeles Example
Here’s another short-duration investment of 12 months with an 11% annual interest and a higher $15,000 minimum. Unfortunately, 3124 Rowena Avenue is about a 35-minute drive away from fabulous Venice Beach.
I highly doubt a Snapchat millionaire is going to want to live in this place. But perhaps a forward-thinking Snapchat millionaire might be looking for multi-family rental properties in LA that generate 10%+ annual gross rents to ensure her fortune lasts longer than a fashion trend.
For 13 years, I invested ~80% of every annual bonus into real estate to diversify away from a highly cyclical industry whose profitability was always under attack. I knew from month one that I wouldn’t last much more than 10 years in the business. By the time I couldn’t take working anymore, I found comfort knowing my real estate investments would help keep me afloat due to rental income and appreciation.
Look In Your Own Backyard
Let’s say you have no interest trying to gain exposure to boomtowns through real estate crowdfunding. You might just have a real estate investment opportunity right where you are.
I’d like everybody to do some research on share whether there are any impending IPOs in your city. You may likely see the same positive effects on your local real estate market as we’ve seen here in SF and LA.
In summary, the success of Snap Inc should:
- Embolden more private companies, especially in tech/internet to go public
- Raise current valuations of private companies in the same category
- Increase investor demand for private companies similar in size and type
- Increase the number of people investing in private equity who normally would not
- Increase hiring by private companies who now have more funding
- Create a larger startup and investor ecosystem in Southern California
- Create FOMO in other cities who wonder why can’t they also start their own ecosystem
- Embolden more individuals to become entrepreneurs
- Create international copycats
- Increase the rents and property prices of surrounding areas
Finally, some of you may be wondering whether I’m willing to buy SNAP at a 55X+ revenue multiple? Hell no! And you better believe every single investor and employee is looking to cash out as much of their pre-IPO shares as possible without sounding alarm bells to latecomers.
I want to see at least a quarter of public performance before making any investment decision. Snap Inc. may become the next Facebook or it may become the next Twitter. Who knows. What I do know is that Snap Inc. has $3.4B more on its balance sheet to spend on growth. I’d much rather try and earn a 10% return selling picks and shovels rather than mining for gold.
Readers, what are some other ways to profit from the Snap Inc. IPO? Anybody from Venice Beach or the surrounding area want to provide some local color? Where do you think SNAP stock goes from here? Please point out any flaws in my investment thesis and challenge me! I want to thank a personal finance consulting client of mine who inspired me to write this post because he actually lives in Venice Beach and asked about my thoughts on this subject again.