Silicon valley bank stock options

Silicon valley bank stock options

By: roh Date of post: 14.07.2017

No one, including the company's management, is currently valuing this in light of an interest rate hike. Never have interest rates remained near historic lows for so long. Of course, we all know this historical oddity was triggered by The Great Recession. If the American economy at the time was a sinking ship, low interest rates were the material used to plug the holes.

But the economy is sailing smooth again now, and it's unrealistic to expect interest rates to stay this low for much longer. But before I make a case for higher interest rates, let's take a gander at why SVB Financial Group NASDAQ: SIVB is a compelling investment even before the inevitable rate hike. SVB Financial Group is a fairly small player in the financial world. BAC and Citigroup NYSE: And yet this bank has carved out a very interesting and profitable niche.

It has become the go-to bank for private equity, venture capitalists, and fledgling businesses - especially those in the technology and medical sectors. While started in the Silicon Valley in the early s, this company today has grown into international presence with offices in strategic places such as India and China. Just briefly, you can essentially boil down SVB Financial's business into three main components: Similarly, you can summarize SVB Financial's income into two distinct kinds: Everything about this carved-out niche aligns SVB Financial with things that are growing.

Both the Chinese and Indian economies are expected to grow in the mid-high single-digits next year. And the upcoming changes with the Affordable Care Act is creating opportunities for some creative healthcare start-ups.

It's those two props that will primarily fly this plane. Despite high profile tech layoffs like Twitter a couple weeks ago , the tech sector is still growing. Real estate prices in Silicon Valley are reaching highs not seen in nearly a decade. If anything, what we are seeing is that the sector is going through a cycle in which the big players are expanding like Facebook's NASDAQ: FB newly approved Menlo Park campus and the smaller players are going through a period in which they are shoring up their financial positions.

When we look at the smaller players in the technology sector, we need to understand the cyclical nature of why they're currently focusing on cash flows and balance sheets.

First, the IPO market has been falling since a peak in , when IPOs priced. Now, when companies choose to go public in an IPO it's usually because valuations are favorable at the time. After all, if you had the choice to sell your company at premium pricing or bargain pricing, which would you choose?

A slow IPO market therefore implies that valuations aren't what they once were. So rather than sell themselves on the cheap, these companies are buying time by improving their financial positions while waiting for market conditions to improve. But that affects venture capitalists. As a venture capitalist, you only realize gains when your position is exited Whether private or public, a buyer is needed. But if the companies are holding out for better valuations, then there isn't a lot of opportunity for exiting, which is suppressing venture capital for now.

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But this isn't permanent. This is just the natural ebb and flow of the economy. New companies will keep innovating. Valuations will rise and eventually fall again. The IPO market will pick up at some point Snapchat CHAT could make big waves in and with it venture capital will also get back in gear.

Of the bear thesis I've seen, most do not dispute that SVB Financial is a great business with a great financial position. Many focus on the temporary nature of the slowing venture capital. It's a fair worry, as this whole system makes up such a large part of SVB's business.

But I like to focus on the long-term tailwinds rather than the temporary headwinds.

In the most recent earnings call, management outlined a six-part growth plan. The six-part growth plan it discussed was good, but does not take into account an interest rate hike.

In fact, CEO Greg Becker said in the earnings call that "we assume no market interest rate increases between now and the end of This is where the true opportunity lies. Many investors are going to take management's words at face value and also not expect a rate hike soon.

These absent expectations mean that a rate hike isn't currently priced into the stock. In reality, interest rates probably already deserved a hike this year. Inflation is low, but steady. Everything points to a healthy economy to raise rates. That may have happened earlier this year had Great Britain not exited the European Union. Financial leaders were unsure of the impact at the time, and may have opted to play it safe then.

Rates may have gone up a couple weeks ago, but then there's this whole USA presidential election thing you may have heard about.

To not influence the outcome of the historically tight race, they may have chosen to wait until the election was over to make changes.

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Whatever the reasons are that rates haven't been raised this year, assuming they remain unchanged through the end of as SVB Financial's management has laid out is just unrealistic.

Just ask Chicago Fed President Charles Evans. He actually sees three rate hikes between now and the end of While he doesn't have a vote this go round on the federal interest rate, his opinion is about as informed as it comes. Now, the last full-year results for SVB Financial showed a net interest margin of just 2.

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The latest quarter came in slightly better at 2. That is historically very poor for this company, and is a direct reflection of the historically low federal interest rate. Yet, this did outperform Bank of America's margin of 2. In the five years leading up to The Great Recession, SVB Financial had an average net interest margin of 6.

Granted, federal interest rates were on the high end of history in , and I doubt we'll see rates - and therefore net interest margins - that high again for some time.

There's no way that goes on very long before investors catch on to the company's newly found earnings power.

Let's pretend that Evans is right and there are three rate hikes between now and the end of One of those hikes could come as soon as December of this year.

It's important to point out that SVB Financial's management is targeting loan growth in the high teens for Let's also assume that for full-year , SVB Financial's net interest margin comes in at 2. But perhaps most enticing is that most of the improvements gained by an improved margin would go straight to the bottom-line earnings per share.

After all, the cost of business won't increase, just the company's earnings power. Ok, so what if this catalyst never happens. Either the federal interest rate remains unchanged, or a raise in rates fails to provide SVB Financial with a boost in net interest margin.

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Where does that leave investors? The growth prospects for this company are very real. High double-digit loan growth is nothing to sneeze at. It still provides an avenue to grow shareholder equity, albeit at a slower rate. But perhaps more importantly, you'll be hard-pressed to find a bank with a stronger balance sheet.

I do have to say, I wish that I had published this sooner. Quite honestly I wasn't expecting the news of President-elect Donald Trump to have such a positive effect on the financial sector even if it's only temporary. That's a big run-up in a short amount of time, but I don't think it's because investors are catching on to this catalyst we are discussing.

The share price if anything is getting back towards historical valuations, and highs that were reached back last year.

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I do believe that today is still a perfectly good entry point. Add in the potential to earn more money with a rate hike even if business remains stagnant. You may be tempted to wait for a pullback. But the data I've seen over the years lead me to believe that no one really times the market consistently well.

I wouldn't wait on a pull-back. But that being said, any pull-back the stock makes in the next few weeks would just be an icing on the cake. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it other than from Seeking Alpha. I have no business relationship with any company whose stock is mentioned in this article.

Long Ideas Short Ideas Cramer's Picks IPOs Quick Picks Sectors Editor's Picks. Will This One Event Send Silicon Valley Bank's Stock Flying? Summary No one, including the company's management, is currently valuing this in light of an interest rate hike. An interest rate hike increases this company's earnings power considerably. The company is still a compelling buy even without the added bonus of a rate hike.

That's the federal interest rate. A bank on the right side of growth SVB Financial Group is a fairly small player in the financial world.

Investing Ideas , Long Ideas , Financial , Regional - Pacific Banks. Want to share your opinion on this article? Disagree with this article?

silicon valley bank stock options

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