I started to write an article about GSV Capital (GSVC) Thursday afternoon and when it closed at $12.14 I was confident that I could make a strongly bullish case. But then something terrible happened! Twitter tweeted that it had made an SEC filing which could presage an IPO and GSVC shot up some $2 in the after hours market. Who knows where it will be when this goes to press.
A Little History - GSVC is an unusual company. It is a business development company (BDC) which invests in the securities of companies which are not yet public but can be anticipated to be future initial public offering (IPO) issuers. It is based in Silicon Valley and tends to invest in tech companies. There are now markets in which the securities of pre-IPO companies are traded in large blocks and GSVC participates in these markets. The investments GSVC makes are generally hard to value and are, of course, subject to risk. On the other hand, these investments are likely to include some explosive growth opportunities.
The Roller Coaster - GSVC stock has been on a rollercoaster since early 2012. In early 2012, investors got overly enthusiastic about the promise of the Facebook (FB) IPO. GSVC had a substantial position in FB stock and investors bid up GSVC stock to $20.45 in January 2012. GSVC issued a follow on offering at $15 a share in early 2012 and it appears to have been oversubscribed. Then, the hammer fell. The FB IPO turned out to be a fiasco and a deep level of investor revulsion set in. GSVC traded down to $6.95 in December 2012 and was priced well below net asset value (NAV). I recommended it in this article at $7.33 and it gradually climbed back over the next several months. I had gotten in a bit below $9 a share in the summer of 2012 and I had a significant period of "buyer's remorse" until this summer. In recent months, GSVC has shot up reaching $14.06 partly in anticipation of the Twitter IPO which is likely to occur later this year or in the first half of 2014. Recently, GSVC announced an issuance of convertible bonds and the stock quickly tanked reaching a low of $11.38 today before closing at $12.14. This afternoon, Twitter issued its "tweet" and GSVC seems to be on an after hours run.
Valuation Methodology - I confess that I am a boring, out of favor, value investor and I like to buy things that are on sale. I got into GSVC because it was trading at a big discount to NAV and this approach has served me well over the years. GSVC's NAV was $12.89 at the end of the last reporting period (June 30, 2013) and this must be our starting point. However, certain events occurred after June 30 which merit NAV adjustments. GSVC sold 175,000 shares of FB at prices higher than the fair value used to calculate NAV. In addition, GSVC's positions in FB and Control4 should be "marked to market" and in each case this results in an upward adjustment. The net result of these adjustments is an increase of 50 cents in NAV.
The Twitter Valuation - A big question in valuing GSVC is the value of its Twitter holdings. As of June 30, GSVC held 1.836 million shares of Twitter and the fair value of its Twitter holdings constituted roughly 16% of its NAV. Some adjustments may be appropriate but they are much more uncertain than the adjustments discussed above. One adjustment would be to look at the fair value of Twitter stock as calculated by another BDC with similar investment orientation. This BDC - Firsthand Technology Value (SVVC) - carries Twitter stock at a valuation of $22.87 a share in contrast to the $18.57 a share used by GSVC. If GSVC were to adopt the SVVC valuation of its Twitter stock its NAV would increase by an additional 29 cents per share. A more aggressive Twitter valuation is described in this article which I find persuasive - using the more aggressive valuation instead of the SVVC valuation, GSVC would pick up $2.68 a share in NAV value.
The table below provides the June 30 NAV, the NAV with the adjustments for FB valuation and sales and Control4 valuation (ANAV1), an NAV calculation adding the SVVC Twitter valuation to the other adjustments (ANAV2) and an NAV calculation using the aggressive Twitter valuation instead of the SVVC valuation (ANAV3); in each case, I have calculated the discount to NAV using Thursday's closing price of $12.14. All data is derived from SEC filings with the exception of the "aggressive" valuation which is based on the article cited above.
The chart reveals that GSVC is priced very attractively at $12.14 a share even without any Twitter adjustment. It is priced extremely attractive if optimistic assumptions are made about Twitter. On the other hand, as I write this, we cannot be sure where it will open on Friday.
One thing we can be sure of is volatility. GSVC stock is like a Rorschach blot - our reaction to it tells us more about ourselves than about the company itself. It is a reasonably good barometer of investor sentiment and rises and falls with the inevitable "risk on, risk off" mood swings of the market. Most recently, GSVC stock tanked on the press release described here about the issuance of convertible bonds. I did not see this as affecting fundamental value in any significant way. The bonds convert at a stock price much higher than its current market price. GSVC did not raise the cash in a desperate effort to "keep its doors open" but, instead, must perceive attractive opportunities in the tech sector to put the money to work. It is generally true that investors perceive the issuance of convertible securities in a negative manner and, given GSVC's history of advances and declines, it is not surprising that there was a rush for the exits.
Then, a little later, we got the Twitter tweet. Again, I do not see this as fundamentally affecting valuation. It should be no surprise that Twitter is planning an IPO and the tweet does not give us any specifics about the date or the offering price. I see a lot of promise in Twitter but it is because of the billions of customer tweets and not because of this one company tweet.
So, investors should have opportunities to buy GSVC the next time the CEO gets a parking ticket or there is a rumor that one ply toilet paper is being used in the company bathrooms or one of the portfolio companies asks for an extension to make a filing. The skittish "Mr. Market" will likely give us opportunities to back up the truck at attractive prices. In this regard, I would be a buyer under $13 a share, I would back up the truck under $12.25 a share, and, between $13 and $14 a share, I would slowly accumulate.