Twitter has fast become a part of today's short attention span society, providing a constant barrage of things to have an opinion on. This was certainly evidenced by the omnipresence of tweets during the recent presidential race, estimated to be over 30 million during election night alone, including a couple by that guy who won. Even established news stations rely on Twitter to get the most up to date feeds from the people closest to a particular story, with sites like ESPN getting breaking news from their reporters no earlier than they are tweeted to their followers.
If one thinks Twitter can successfully monetize this exposure, then you might be interested in acquiring a stake in the company. Even though it is not yet publicly traded, there are actually a couple special situations where you can do so, at an apparent discount no less! Several business development companies, which are akin to publicly traded venture capital firms, have been dragged down by the pessimism surrounding other social media stocks such as Facebook (FB), Zynga (ZNGA), and Groupon (GRPN).
If you can't pay people to own Facebook, how about Twitter?
The first of these is Firsthand Technology Value Fund (SVVC), which has both benefited from and been hurt by being an early investor in Facebook. The stock initially ran up just prior to the Facebook IPO and the company was able to make a well timed follow-on offering to raise a significant amount of cash. This huge cash hoard still exists on the balance sheet pretty much intact and actually is now greater than the company's entire market cap. This is due to the fact that the share price has steadily drifted down in sympathy with Facebook, even though SVVC's stake in FB is now less than 6% of the fund's total assets.
In contrast, the cash portion of the assets is almost 80%, representing $18.15 per share, meaning you can essentially get the rest of the fund's assets for free at today's price. In addition to the aforementioned Facebook, these include a newly increased stake in Twitter, such that it now represents approximately 5.6% of the fund's assets, and a 3.7% position in SolarCity, Elon Musk's residential solar power system installer. Together with several smaller positions and the fund's cash, the net asset value (NAV) of the company was almost $23 as of September 30th, more than 30% higher than the current share price.
The combination of the undervalued nature of the stock with management's reluctance to deploy the rest of its capital, thereby collecting exorbitant management fees for sitting on the cash, has led several activist investor funds to take aim at SVVC, calling for increased buybacks to realize some of this value for shareholders instead. This could provide a catalyst to narrowing the gap between the company's assets and its share price, not to mention the possible additional boost if Twitter, SolarCity, or one of its other holdings were to go public.
Moe money, Moe problems
The second company with an even more significant Twitter stake is GSV Capital (GSVC), making up nearly 14% of the company's assets. Like SVVC, it also trades at a significant discount to these assets, and while its cash balance is not as high at only 16% of assets, this still represents about $2.20 in cash per share, compared to a current share price of only $7.
Since the company's inception, founder and portfolio manager Michael Moe has invested a total of approximately $224 million in 44 companies, which are now pegged at a total portfolio value of about $217 million. Combined with its cash, this represents a NAV of $13.45, almost double where the stock is trading right now, although you could argue that the value at which some of these investments are carried on the balance sheet might be optimistically inflated, especially since they haven't declined as much as most of the publicly traded social media names.
However, on the most recent conference call, Moe stated that only 24% of the funds were in Social Mobile, with 24% in Cloud Computing/Big Data, 11% in Internet Commerce, 31% in Education Technology, and 10% in Cleantech. This focus on identifying certain areas that are expected to enjoy market expansion seems to follow the strategy Moe laid out in his book Finding the Next Starbucks. This involves identifying these "megatrends" and the companies that can benefit from them, and Twitter certainly seems to fit the bill of being at the forefront of a major trend. While I don't necessarily completely buy his growth driven strategy, he does emphasize that ultimately earnings determine the true value of a company, something I definitely agree with and a refreshing contrast to most Silicon Valley venture capitalists who seem to get more excited the more money a company is losing.
It remains to be seen if Moe has picked some other long-term successes besides the promising Twitter, but GSVC's current discount to its assets should provide enough of a margin of safety even if he hasn't picked all winners. The company could be a smart way to add some potential growth companies to your portfolio for cheap, and I think the stake in Twitter alone makes it worth a gamble since that plus its cash stash is more than half the market cap of the entire company. And if you happen to disagree with me, feel free to hit me up on my newly created Twitter account @IlluminatInvest to debate, since everyone else is doing it.