GSV Capital Remains Undervalued With Shares At 50% Of NAV And Upcoming Catalysts

Aug.12.14 | About: GSV Capital (GSVC)

Summary

Shares of GSV trade for less than 51% of net asset value.

Large stake in Twitter continues to increase in value and offers a cheap way to invest in the social media company.

Upcoming IPOs could boost valuation and interest in the boring pre-IPO investment company.

GSV Capital (NASDAQ:GSVC) has been a hot stock to trade over the last three years. The company was an early pre-IPO investor in Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB), which gave investors access to the hot social media companies. Twitter remains a large holding, but investors seem bored with the company that focuses on pre-IPO investments and later cash-outs. That boredom has made GSV shares cheap and sets up a strong opportunity for investors.

GSV reported a net asset value of $14.86 per share for the end of the second quarter. This was an increase from the prior year, but was down $0.05 from the prior first quarter report. A decline in the value of top holding Twitter had a $0.15 impact on net asset value per share.

One of the most noteworthy items from the second quarter earnings is the company's stance on Twitter. The lockup period on selling shares of Twitter expired May 6th, but GSV has not sold a single share. The company doesn't plan on selling anytime soon, "as we believe there is substantial near term upside in the stock and we believe that investors are just now starting to understand the power of the Twitter platform."

GSV valued its shares of Twitter at $40.97 based on the closing June 30 price. On Friday, shares of Twitter were trading hands at $43.13, 5% higher. GSV purchased 1.9 million shares of Twitter in a total of 16 separate transactions. The company paid a range of $14 to $19 per share, with a cost basis of $17.36.

During the second quarter, GSV Capital exited its stakes in several portfolio companies. Among them were:

  • Sold Control4 position for profit of $5.5 million
  • Sold Facebook position for profit of $900,000
  • Sold Violin Memory position for loss of $9.9 million
  • Sold Silver Spring Networks position for loss of $3.6 million

GSV also added several positions in the second quarter. Among them are:

  • Investment in Declara, now the 10th largest holding. Company is a social collaborative learning platform.
  • New investment in Early Shares
  • Added to Solexel position, a top ten holding. GSV believes the company is the leading private solar company and a new partnership with GAF, the largest roofing material manufacturer in the US, will lead to increased revenue and demand.
  • Added to Stormwind position

Here is the most recent top ten holdings for GSV Capital (as of June 30, 2014)

Company

Portfolio Value

% of Portfolio

Twitter

$77.9 million

21.2%

Palantir

$41.2 million

11.2%

Dropbox

$28.2 million

7.7%

2U

$19.3 million

5.3%

Coursera

$14.5 million

4.0%

Avenues

$11.3 million

3.1%

SugarCRM

$11.1 million

3.0%

Solexel

$11.0 million

3.0%

PayNearMe

$10.0 million

2.7%

Declara

$10.0 million

2.7%

Click to enlarge

Investments in well known names like Lyft, Gilt Groupe, and Spotify don't show up in the top ten holdings. Also public companies like Chegg (NYSE:CHGG), TrueCar (NASDAQ:TRUE), 2U and Cricket Media (OTC:EPCPD) all fail to crack the top ten holdings. Lyft may be an extremely important company for GSV Capital's future and is one of several catalysts going forward.

  • Upcoming IPOs: There is a strong possibility that several GSV holdings go the IPO route in the next 12 months. The company believes any of the top ten holdings could go this route, with the exception of Twitter which is already there. Dropbox is the most logical candidate, but I believe smaller holdings like Spotify, Lyft, and Gilt Groupe could also be going public soon.
  • Lyft could continue to be valued higher due to the increased valuation and demand for rival Uber. Uber had a valuation of $3.5 billion back in August of 2013. Less than a year later, the company got a $17 billion valuation from a new $1.2 billion funding round this June. GSV invested $5 million in Lyft, which represented 1.3% of the portfolio at the time of the investment. The company has not entered the top ten holdings, but has likely risen in value.
  • IPO of Dropbox: The IPO of Dropbox will have a huge impact on the price of GSV Capital shares. The company has been an IPO target for a while, but pieces are starting to fall in place. Dropbox recently hired an experienced chief financial officer, one of the first steps in going the public route.
  • Sale of public companies: Five of GSV's portfolio companies are now publicly traded. The company has to normally wait six months from the IPO date before it can sell its stake. The six month holding time for Twitter recently passed. GSV has stated it does not plan on selling its shares of Twitter soon, but that might not be the case with Chegg, TrueCar, or 2U.
  • Third quarter earnings: The recent increase in Twitter's share price could be reason enough to believe that the NAV of GSV will increase in the next quarterly report. NAV declined $0.05 quarter over quarter for GSV. If Twitter can keep up the momentum and other portfolio companies continue to make gains, NAV will be above $15 per share.
  • A long term catalyst could be the future dividend payment made by GSV Capital. From the second quarter earnings call, GSV offers this, "As GSV's portfolio matures and we realize a cumulative net realized gain, GSV intends to distribute a portion of such gains to shareholders in the form of a distribution."

The company continues to focus on what it believes are key investment themes. Here is a breakdown of how the company's portfolio fits into the themes:

  • Education technology: 33.8%
  • Social mobile: 25.8%
  • Cloud and Big Data: 24.7%
  • Marketplaces: 10.8%
  • Sustainability: 4.9%

It's this weighting that presents one of the biggest risks for GSV Capital in my opinion. I believe the company is too weighted in education names. Here are some other risks in investing in GSV Capital:

  • Heavy weighting in education sector. The company seems overly optimistic on education names like Coursea, Declara, and Chegg. This could be a downfall as valuation for education names hasn't grown at once high rates.
  • Reliance on Twitter: At 21% of portfolio holdings, Twitter is a huge part of GSV's direction. Any time Twitter has a big move one way or the other, shares of GSV normally react. While this has been a recent benefit with strong Twitter earnings, it could also send shares down if Twitter can't keep up the momentum
  • Failure to produce IPOs: As mentioned in the lead-in, investors have become bored with GSV since Twitter and Facebook went public. With executives saying they plan on keeping shares of Twitter and portfolio companies like Palantir ruling out IPOs, investors may see a year of flat trading and shares could be sent down further on weak demand.
  • Declining value in public names: As mentioned above, two portfolio positions (Silver Springs, Violin Memory) were sold at losses. This might happen in the future with any companies that go public. Chegg and TrueCar haven't been runaway successes and GSV may not recoup its original investment when it exits its position.

Shares of GSV Capital ended the week trading at $9.84. This is well towards the bottom of the 52 week range shares have seen ($8.46 to $16.90). Last Tuesday, shares traded as high as $10.40 after a strong report from Twitter increased the value of GSV going forward.

Since the beginning of 2014, shares of GSV have dropped 18.2%. The recent movement behind the company has seen shares increase 6.6% in the last three months, which could be the start of an upward trend. Since the company's April 2011 IPO, shares are now down 32%.

Net asset value is always an interesting way to value a company like GSV Capital, but remains the best one. The company may see several holdings decline in value, but the main positions are all in good shape, offering NAV increases or steady holding going forward. An investment in GSV Capital is an investment in Twitter's future and also the success of the other portfolio companies. With more than 50 emerging companies and a history of strong investments, investors should be buying this company as its valuation is too cheap to ignore.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.