For months now, people have clamored for a way to get access to shares of Facebook (FB). And one of the securities often mentioned as a way to get access to Facebook stock was GSV Capital (GSVC), a business development company that went public in 2011 to much fanfare.
The stock has been through quite a bit in the past year or so, as the company was both criticized and recommended by various investors. To some, this was a way to get access to some of the fastest-growing companies in the United States, such as Facebook, Dropbox, and Twitter (just a few of the companies in GSV Capital's portfolio). And to others, this company was an overly hyped, overvalued investment whose appeal would fade once Facebook went public. We see a bit of truth in both statements. At times in 2012, the company was indeed overvalued relative to its NAV (net asset value). And the company does offer investors access to fast-growing companies that most would otherwise be unable to invest in.
After analyzing the company's portfolio and its balance sheet, we believe that at this point in time, shares of GSV Capital are deeply undervalued, and we present our bullish thesis below. But first, a note of caution.
The Importance of Timing
Investors who are either in GSV Capital at this point in time, or readers considering an investment in the company must first ask themselves how long they are willing to hold the stock. While many investors and traders may have seen the stock as a way to play the Facebook IPO, GSV Capital was not set up that way. The company is meant to invest in fast-growing, but maturing private companies, such as Twitter or Dropbox, and hold them at least to IPO, if not beyond. Currently, just 2 of GSV Capital's portfolio companies are public: Facebook and Groupon (GRPN) [the company also owns a structured note that may be redeemed for Zynga (ZNGA) stock]. The rest of GSV Capital's investment portfolio is in companies that will be profitable in the long-term, but take time to have their true potential realized.
Our bullish stance on GSV Capital applies to a long-term investment in the company. For those simply looking to trade the company based on IPO's of portfolio companies, that time has passed. The next candidate for an IPO from the company's portfolio is Twitter, and that IPO is at least several years away. Therefore, we believe that the only investors who should consider buying GSV Capital are those who are willing to hold the stock for some time in order to realize an acceptable rate of return on their investment. We bough the stock knowing that we would have to wait some time to realize an acceptable return on the stock. With that being said, we now turn to the core of our bullish thesis: GSV Capital's valuation.
Net Asset Value: Buying a Dollar for Under a Dollar
Because GSV Capital invests in the securities of other companies, a key valuation metric for the company is its net asset value per share. And after analyzing the company's portfolio investments and its balance sheet, we believe that the company is deeply undervalued.
Our analysis shows that GSV Capital trades at a Price-to-NAV ratio of just 0.9. And a look at the balance sheet shows that the company has a large margin of safety. (For those interested in the underlying statistics, a spreadsheet of our valuation analysis is available here).
GSV Capital recently reported its results for the first quarter of 2012, where the company discloses that it had a net asset value of $13.47 per share, with 12,420,100 shares outstanding. The company closed at $13.15 on Friday, May 18. Even on its own, that implies that GSV Capital is slightly undervalued, at a Price/NAV multiple of 0.976. The stated NAV, however, does not take into account recent developments.
On May 11, GSV Capital announced the pricing of a secondary offering of its stock. The company sold 6,900,000 shares at a price of $16.25 per share, for proceeds of $112.1 million. The fact that the company priced these shares at a large premium to NAV suggest underlying confidence by institutional investors in the GSV Capital's future. As a result of this offering, GSV Capital's total outstanding share count grew to 19,320,100. The offering however, was accretive to the company's NAV, and it helped bring it up to $14.61, which is the company's NAV as of May 18, 2012, by our calculations.
Our methodology calculates an adjusted NAV based on the most recently available valuation for GSV Capital's portfolio companies. For Facebook and Groupon, we simply took the most recent closing price. For larger private companies, such as Twitter or Dropbox, we took the most recent clearing price on SharesPost, one of the two secondary markets for private companies (and itself a GSV Capital portfolio company). What is interesting about GSV Capital at this point in time is that a large majority of the company's NAV is derived from cash. GSV Capital has $10.53 per share in cash & equivalents on the balance sheet, when the proceeds of its recent secondary offering are accounted for. The company's investments account for just $4.07 per share, as of May 18, 2012. The company has $0.03 per share of other assets (such as accrued interest), and its liabilities total $0.02 per share. As a reminder, our spreadsheet detailing GSV Capital's valuation and investments can be found here.
|Cash & Equivalents||$10.53|
GSV Capital's large cash balance per share gives it a high margin of safety at this point in time. GSV Capital does not simply invest its money in whatever private company happens to be the latest sensation sweeping Silicon Valley. The company screens potential portfolio candidates carefully, and would rather sit on cash than invest in a poor-quality company.
With over 19 million shares outstanding, GSV Capital has become a more liquid stock over the past year, which should help reduce volatility over time. Per FinViz, average daily trading volume has grown to almost 760,000 shares since the company went public, and that figure should rise as more investors become aware of the stock and the share count grows (GSV Capital is likely to issue stock from time to time, it is inherently a part of being a business development company).
Analyst coverage of GSV Capital is virtually non-existent, given the company's small size. Currently, just 2 brokerages cover GSV Capital. Ladenburg Thalmann has a buy rating and $17.25 price target on the stock. And Ascendiant Capital initiated coverage of the stock on May 2, with a buy rating and $20 price target, citing the strong state of the venture-backed technology market, in terms of M&A activity and IPO's. While some of Ascendiant's bullish thesis was based on hype from the Facebook IPO, we believe that even without that, a long-term price of $20 is achievable.
Now that the hype surrounding the Facebook IPO has passed, GSV Capital can be evaluated on the basis of its fundamentals. Though we trimmed our position this week ahead of the company's IPO, we did not exit it, and used Friday's weakness to add to our position. We are confident in GSV Capital's long-term potential, and think that investors would do well to add to or initiate positions in the stock based on its recent weakness due to the fact that they hype surrounding Facebook's IPO did not materialize. In the long run, we do not think that will matter. GSV Capital is a unique company that is now undervalued based on where it trades relative to its net asset value. We believe that in the long run, this disparity will not remain, and recommend that investors take advantage of it. Long-term investors should be rewarded for their conviction.
Additional disclosure: We are long shares of GRPN via our holdings of GSV Capital