Silicon Valley Bank (SVB) is our first stock pick in a new sub-series of the podcast.
We take a stock and dissect it thoroughly from the statistics and information we have access to. We’re going to dissect the stocks according to 4 big values; circle of competence, moat, management, and price, then come to a verdict. Most of the companies lie in our area of expertise and we’re going to start with Silicon Valley Bank (SVB) – a company that provides loans and ancillary financial services to startups, private equity, and venture capital firms.
The bank has 4 segments – Global Commercial Bank, SVB Private Bank, SVB Capital, and SVB Leerink. The bank provides loans but also invests in private equity and venture capital funds. It operates across the US (based out of northern California) and also has offices in UK, Israel, China, and India. Around 4,500 people work for the bank, and the company’s peers include The First Republic Bank, US Bank Corporation, Boston Private Financial P & C, and DFC.
So, those are the basics of the company – its vital signs – and the first things to read about when considering an investment. From there, it’s on to the first of the 4 big values; circle of competence.
Consider whether SVB or any other stock falls within your circle of competence and, if it doesn’t, figure out what you need to know in order to really understand your potential investment,
Your circle of competence might not necessarily be an area in which you’re qualified or certified – it might just be something that interests you and which you’ve studied in your free time. Either way, investing in companies you understand is a lot easier than picking stocks in industries you have no knowledge of.
Moving on to “moat” – SVB does a great job with this. They have an innovation moat in that they’ve become the “go-to” place for status, early-stage businesses and banking services for founders. If you want to grow, scale, and develop your idea in Silicon Valley (or elsewhere in the Tech world), SVB has become recognized as the bank to partner with. SVB has a reputation of being able to turn ideas into fully functioning and – ideally – profitable businesses. The bank has also done an excellent job of offering digital services – a major attraction to the tech-savvy founders of Silicon Valley.
SVB’s moat is further enhanced by the sheer size of its resources.
They have over $300 billion of investor capital available to them, so even as startups grow into huge businesses, there is no need for them to look elsewhere for baking and financial services. SVB has the ability to scale its resources and products to meet the demands of clients as they grow.
SVB also looks good when studying EPS (Earnings Per Share). EPS has been increasing quarter over quarter – their EPS has grown steadily from 28% to 35% over the last 7 years. Sales growth has also increased from 16 to 25% in the space of just a couple of years. All of these figures and factors add to a respectable moat that keeps them safe from competitors and other threats. As if all that wasn’t enough, a JPMorgan analyst believes that SVB’s share price could reach $700 from its current level of $550 thanks to a forecast growth rate of 30% for this year.
Management is the next area of SVB under the microscope.
As with every business – it’s important to understand exactly who is running the company and what that means for the business’ outlook. 13 people (of which 3 are women) make up the core leadership team at SVB, and the CEO is Greg Becker, who has worked at the company since 1993 and under his leadership, SVB has achieved extraordinary things. It has been named amongst Forbes list of “Top Ten Banks,” Newsweek called SVB one of the most responsible companies in their industry, and it’s also known for its philanthropy – a real distinguishing factor between SVB and its rivals.
The Chair of the SVB board is Roger Dunbar. Unlike many businesses, the Chairman and CEO are different individuals and beyond those 2 figures, there’s a broad representation of interests on the board – it’s not simply banking experts running the company, and one of the board members is from the US Treasury.
Turning to the figures.
SVB is fairly strong on 2 key metrics – Return on Equity (RE) and Return on Investor Capital (RIC). Ideally, both of these figures would at around 15% over a 10-year period, and for SVB’s are 12.7% RE (it’s worth noting that this has climbed to around15% in the last year) and 10.7 for RIC (which is also around 3% higher than that over the past year). Neither SVB’s RE nor RIC is outstanding but both are good. Debt levels are also manageable, with less than a year’s worth of earnings in debt – around half of the maximum level a responsible company would hold.
The final key discussion is price. There’s no point doing all this research and deciding that you’ve found a good company in which to invest, only to then discover that the price of the shares is too high. SVB shares are – at the time of writing – $565.21 per share. However, the intrinsic value of the shares is around $160 and the recommended safety margin we’d recommend for value investors is half that, meaning that the target price for the shares is $80. That may feel far off from the current price, but a scandal, a major economic event, or any other unforeseen circumstance could send SVB’s share price plummeting to somewhere near our buying target of $80 to around $200.
Given how high the current share price is versus our target price, and how seemingly successful the business is, we could perhaps consider buying it as a growth stock rather than a value stock. Even if the price is high, SVB is growing, and it could still be in your portfolio as a growth company – it’s a solid business that is well run and is showing no sign of slowing down.
Looking for more information about the stock market, value investing, and more? Please check out the Stocks4Docs Podcast.