As of Dec 31, 2011, Firsthand Technology Value Fund (SVVC) had an NAV of $23.92 per share. It recently closed at $45.18 which is 88 percent higher than its NAV. Huh? Why is this trading at such a premium? Are investors seeing something else in this publicly traded venture capital fund that I am missing?
Wait a minute; let's look closer at their holdings. Their largest position is in the soon to be 100 billion dollar IPO darling Facebook (FB). The company owns 600,000 shares of Facebook which investors can't wait to get a piece of. In anticipation of the IPO investors are ridiculously bidding up the largest publicly traded shareholder of Facebook shares.
When Facebook halted trading on the secondary markets last week, the last auction for the shares done on SecondMarket (a private market exchange) were done at $43.50, which values Facebook at 108.7 billion (I will get to more of my thoughts on that valuation in a minute). With a price of 43.50, basic math values Firsthand Technology's 600,000 shares at 26.1 million. Using the company provided 12/31 NAV components and only adjusting for the latest Facebook and Yelp (YELP) (oh, did I mention the fund owns that one too?) prices I calculate an updated NAV for the company of $26.14 per share. Ok, that is better, right? It only trades at a 73 percent premium to NAV. As one famous Wall Street commentator would say, WRONG! This stock's price has gotten highly inflated at these levels and will make for an excellent investment on the short side.
To further support my short sided hypothesis, even Firsthand Technology knows their stock price has run up too much, and they are striking while the iron is hot filing an N-2 (filing for closed-end investment companies) with the SEC. Heck, who can blame them? Firsthand Technology is filing to raise $25 million in a secondary offer. It will be interesting to see if they sell the $25 million in shares at NAV or at a 30-40 percent premium to NAV. In their N-2 prospectus the company warns of overvalue to real NAV.
Lastly, and maybe I should save this for another article, what is the upside to Facebook shares? Fine, you want to give it a value of $110 billion - I think that is lofty, but I will let you have that one. Like Apple (AAPL), Facebook has created their own industry called social networking, so that deserves a premium. I am not going to analyze the financials or growth prospects of Facebook; I am just going to take a Peter Lynch approach. Facebook is a social networking site that I would imagine eventually people will bore with. I mean let's face it, updating your Facebook page is work. I notice the news feed for the "friends" my wife has connected with has slowed down considerably over the past year. The only "friends" that continuously provide updates are the ones that update every hour because they want you to know what they are doing every moment of the day. Yuck!
Anyone remember what became of the social networking site prior to Facebook? MySpace? Do you remember that? Everyone who was cool had a MySpace page - then what happened? And who's to say the same thing can't happen to Facebook. Facebook is a website. They don't produce any hardware that requires a new version (which every consumer must have), released every 6 months a la Apple. My point is I can't see much further upside in Facebook shares from where it last priced in the secondary markets.
At this point, only a fool or a nervous short covering is buying at these levels. If you are currently short Firsthand Technology, good for you, my advice is to have patience as the top is near. If you are not short yet, what are you waiting for?