SVB Financial Group (SIVB)

SVB Financial Group (SIVB)

Summary:  On Sale

Score:  17/20

MOS:  80%

Share Price:  $750

Sticker Price:  $3,768

Is SVB Financial Group stock a good buy?

 

The previous Tykr review on SVB Financial Group was completed on July 31, 2020. At that time the summary was as follows:

Summary:  On Sale

Score:  17/20

MOS:  79%

Share Price:  $220

Sticker Price:  $1,062

This shows the share price has increased by 240% in just over a year. In this article we’ll break down the SVB Financial Group business model and why this bank’s stock is growing much faster than other bank stocks.

 

SVB Financial Group or otherwise known as SVB was founded in 1983, is headquartered in Santa Clara, CA, and has banking locations in the US, UK, Canada, Hong Kong, China, Israel, and Germany.

Here are some interesting facts on SVB.

  • In 1983, they were structured as a traditional banking institution by offering basic lending services. It soon after expanded to VC (venture capital) to serve early stage high growth companies. This expansion proved to be highly lucrative over the following decades.
  • In 1987 they went public.
  • In 1992 they were hit by the real estate bust in the US and the company recorded a $2.2M loss.
  • In the mid-1990s they provided early VC funding to Cisco and Bay Networks. In 1995, Cisco’s stock was around $2. In 2005, the stock reached $20, a 900% total return and 25% annualized return over 10 years. In 1998 Nortel bought Bay Networks for $9.1B. Both investments proved to be massive payouts.
  • In 2000, SVB’s stock soared from $20 to $70.
  • In 2000, SVB’s stock crashed 50% due to the dot-com bubble due to their large allocation in tech startups.
  • In 2004, they opened locations in India and the UK. The India location is now a non-banking subsidiary as it’s primarily an IT and office support division.
  • As of 2021, they have invested in 50% of all VC backed tech and life science companies in the US.

How is SVB different from other banks?

Similar to traditional banks, SVB does offer business banking services including checking, credit cards, and lending. They also offer asset management to consumers. However, there are two services that make SVB different from other banks.

  1. SVB offers VC  banking for other VC firms. Venture capital banking is similar to traditional business banking except the support, guidance, and connections in the VC industry provides VC firms with easier access to investment opportunities. In other words, SVB is sort of like a network for VC firms. If you want to shake hands and get involved with great companies at early stages, banking with SVB provides you with that opportunity. Some of the VC firms that work with SVB include Sequoia, Greylock, 83North, Accel, Index Ventures, Zetta, and more.
  2. SVB is a venture capital firm as well. They invest in early stage companies and as those companies grow, their VC division generates massive profits.

I know some of the Tykr customers work in finance so the following may already be known but here is a quick breakdown between bank lending and VC.

With bank lending, the average annual interest rate is between 3% and 7% depending on the credit history of the company and in most cases the companies are already well established and have a track record of revenue and profits. Let’s say a company is looking for a bank loan of $1M. At 7%, the company will pay $70,000 for the loan. When you have a lot of companies taking out loans, the revenue can add up fast for a bank. 

With VC, the risks are much higher but so are the potential profits. VCs invest in companies that in many cases are not generating a profit but have the probability of substantially increasing revenues and profits in the future. VCs charge what is known as 2/20. 

  • The 2 represents a 2% management fee to the investors, also known as limited partners, who provided the funds. A limited partner could be another business or a person with a high net worth. The management fee covers salaries and other business expenses. The 2% is similar to how a financial advisor or wealth manager may charge a consumer, which is typically closer to 1%. In other words, the VC firm charges the 2% to manage the money. Keep in mind, some VCs don’t charge a percent because the management fee isn’t where the big profit is made. This is where the 20 comes in. 
  • The 20 represents a 20% profit or in VC terms it’s also known as a carry. For example, let’s say a VC invested $10M in a tech company. That $10M isn’t the VCs money, it’s the limited partners money. The VC is responsible for deploying the capital into profitable ventures. Now let’s say that company sold to another company for $50M. That means the VC would earn $10M (20% of the $50M). It’s essentially like a commission for finding the investment in the first place. Overall, VCs make big profits through acquisition examples like this as well as IPOs.

Some of the tech companies that SVB invested in through the years include Square, Teladoc, Bill.com, Transferwise, Zendesk, Stemcentrx, Remitly, and more.

Here is what the news has to say about SVB.

This article from fool.com states that SVB is a bank that is blowing away the competition. As mentioned in the article, SVB stock has not behaved like traditional bank stocks. Due to the success of the venture capital division, SVB is growing like a tech business itself.

This article from Zacks.com states that SVB surpassed the Q3 EPS estimate of $5.06 with a $7.26. This primarily due to the net income which increased 61% over the last year.

This article from prnewswire.com states that SVB held its 11th annual Tech Gives Back event where SVB employees, clients, and partners volunteered and supported 25 non-profit organizations. This year they raised over $500K and had more than 600 volunteers. The event not only raised funds and provided help but it also offered speed networking and mentorship opportunities for college students.

Here is how SVB stacks up against the competition.

SVB Financial Group (SIVB)

Summary:  On Sale

Score:  17/20

MOS:  80%

Share Price:  $750

Sticker Price:  $3,768

Revenue: $3.9B

 

Goldman Sachs (GSBD)

Summary:  On Sale

Score:  15/20

MOS:  80%

Share Price:  $19

Sticker Price:  $95

Revenue: $146M

 

Wells Fargo (WFC)

Summary:  Overpriced

Score:  2/20

MOS:  1%

Share Price:  $49

Sticker Price:  $50

Revenue: $72B

 

JPMorgan Chase (JPM)

Summary:  Overpriced

Score:  9/20

MOS:  49%

Share Price:  $167

Sticker Price:  $330

Revenue: $119B

 

Comerica Incorporated (CMA)

Summary:  Overpriced

Score:  9/20

MOS:  1%

Share Price:  $87

Sticker Price:  $88

Revenue: $2.6B

 

Now let’s take a look at the 4 M’s. A wise investor should always look past the numbers and look at the business.

MOS: A total score of 17/20 and MOS of 80% are impressive especially when you compare SVB against the competition. When you look at the score breakdown in Tykr you can see the ROIC is 6/6 which means they are continuously reinvesting profits back into profitable companies. The Equity Growth Rate is 3/3, the Sales Growth Rate is 3/3, and the Cash Growth Rate is 2 out of 3. There is some room for improvement on the EPS Growth Rate which is 1 out of 3 but the overall financials are very strong.

Meaning: Banking is typically a slow and steady business model. You typically won’t see big returns like you do with tech businesses but SVB is different from the average bank. The VC division of the company has proven to be highly successful which has resulted in a 240% share price increase in just over one year. Will SVB and VC be around in 10 years? Absolutely. New tech startups will continue to enter the market and SVB is on the front line, able to pick and choose who they work with.

Moat: The VC division has separated SVB from the competition. It’s also important to note the global footprint with locations in major markets around the world allows SVB to find great companies early.

Management: Greg Becker has served as President and CEO of SVB since 2011. He joined SVB in 1993 and held positions including co-founder and managing director of SVB Capital, Chief Banking Officer, and President of Silicon Valley Bank. Becker has surrounded himself with a lot of excellent banking professionals and investors. The SVB track record of finding great companies early is reflective in the impressive financials and share price. As long as Becker continues to empower his team to make great investments, SVB will continue to thrive well into the future.

 

Now let’s take a look at the financials. A wise investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

2017:  $1.9B

2018:  $2.6B

2019:  $3.2B

2020:  $3.9B

Revenue has consistently increased year over year which is a great sign.

 

Net Income (Found on the Income Statement)

2017:  $490M

2018:  $973M

2019:  $1.1M

2020:  $1.2M

Net Income has increased year over year which is a great sign.

 

EPS (Found on the Income Statement)

2017:  9.33

2018:  18.35

2019:  21.90

2020:  23.05

EPS has increased year over year which is a great sign.

 

Free Cash Flow (Found on the Cash Flow Statement)

2017:  $529M

2018:  $887M

2019:  $1B

2020:  $1.3B

Free Cash Flow has consistently increased which is a great sign.

 

Total Assets (Found on the Balance Sheet)

2017:  $51B

2018:  $56B

2019:  $71B

2020:  $115B

Total Assets have consistently increased which is another great sign.

 

Total Liabilities (Found on the Balance Sheet)

2017:  $46B

2018:  $51B

2019:  $64B

2020:  $107B

Total Liabilities have increased which is okay. As companies grow, they need to hire more employees. More employees means more liabilities.

 

Total Debt (Found on the Balance Sheet)

2017:  $1.3B

2018:  $1B

2019:  $365M

2020:  $1.1B

Total Debt has increased substantially since 2019. This is worth paying attention to but not a big threat to the rest of the balance sheet. 

 

Total Equity (Found on the Balance Sheet)

2017:  $4.1B

2018:  $5.1B

2019:  $6.4B

2020:  $8.4B

Total Equity has increased year over year but the increase from 2019 to 2020 is quite impressive.

SVB is a bank in a class of their own. The VC division combined with the strategic locations around the globe on the front line of new tech developments allows them to find great companies at early stages. Knowing the businesses they’ve served in the past shows they have a track record of picking winners. As long as Becker continues to empower his teams to research and invest in great companies from around the world, SVB will continue to see great results.

If you like banking stocks and tech stocks, SVB is a perfect balance of both.

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.