Anyone who participates in the markets on a daily basis surely knows that they are often irrational. And in 2012, that irrationality has been on full display in shares of the Firsthand Technology Value Fund (SVVC). The fund, seen as a proxy for Facebook (FB) has seen wild swings this year.
(click to enlarge)Though the fund is up over 30% year-to-date (even taking into account its recent fall), our analysis of the company shows that the stock is undervalued at current levels. Throughout 2012, the stock has rallied consistently due to hype surrounding the IPO of Facebook. But now that Facebook has made its public debut, the Firsthand fund has fallen sharply, due to the fact that the mania people expected did not materialize. We think this is a positive for Firsthand shares, as the stock can now be judged based on its fundamentals. We have been in an out of the stock in 2012, and sold ahead of the IPO, but are now looking to once again initiate a position.
Secondary Offering: Brilliant Market Timing
One thing cannot be denied about the management at the Firsthand Technology Value Fund: they seem to have impeccable market timing. The company's secondary offering was priced and completed just before the stock tumbled, at $27 per share. The fund sold 5,060,000 shares for net proceeds of $127.7 million. As a result of this offering, the fund's shares outstanding more than doubled to 8,556,480, and the company now has a large warchest of cash with which to make new investments.
Furthermore, this secondary offering should have the benefit of helping smooth out the volatility of this stock, due to increased trading volumes. Because there are no options for the Firsthand Technology Value Fund, volatility is something that owners of the stock must be aware of. But for long-term holders of the stock, we think that the volatility is not a dealbreaker.
Net Asset Value: 75 Cents Here, A Dollar There
We turn now to the fund's net asset value, which forms the core of our bullish thesis on the stock going forward. Closed-end funds, like the Firsthand Technology Value Fund, usually trade at some sort of discount to their NAV. But in this case, we think the discount is overdone, especially when readers and investors see just what assets make up this fund's NAV. For the record, our methodology for determining the fund's current NAV is this. For the 3 public companies in the fund's portfolio, Facebook, Yelp (YELP), and Intevac (IVAC), we used the closing prices as of May 21, 2012. For the other companies, we used the most recently available valuation on SharesPost (the leading secondary market). If no up-to-date valuation is available, we used the valuation data derived from the fund's 10-Q filing for the first quarter of 2012. Readers and investors interested in a breakdown of our valuation by security and assets may access a spreadsheet of the data here.
Our analysis of the fund's assets and liabilities reveals several interesting facts. First off, the fund trades at a price/NAV ratio of just 0.75 as of this writing, much deeper than the usual discount closed-end funds receive. But the most important is that the Firsthand Technology Value Fund doesn't simply trade at a discount to its net asset value. It trades at a discount to its cash.
Per the fund's 10-Q filing, it held $45,190,270 in cash as of March 31, 2012. But, the company also brought in $127,700,000 in cash from its secondary offering, resulting in a cash balance of $172,890,270. The fund announced a purchase of 100,000 shares of Twitter for $1.8 million, so its current cash balance stands at $171,090,270. Based on the company's 8,556,480 shares outstanding, the Firsthand Technology Value Fund has $20 per share in cash on the balance sheet. As a reminder, the stock closed at $18.69 on Monday, May 21. We do not think this discrepancy will last for long, for we have not yet included any value from the company's investment portfolio. Our analysis of the company's investment portfolio shows that the company currently holds $4.57 per share in investments, spread amongst 12 different companies. Our breakdown of the company's NAV is as follows. As a reminder, a spreadsheet detailing our analysis of the company's assets & liabilities may be found here.
|Item||NAV per Share|
Though the hype surrounding Facebook drove the stock to a huge premium to NAV (a rally that we rode for some time), Facebook itself has little impact on the fund. The Firsthand Technology Value Fund holds 600,000 shares of Facebook, which were worth over $20 million as of the close of trading on Monday, May 21. However, that is equivalent to just $2.39 per share, representing under 10% of the fund's overall NAV. The fund has a cost basis of $31.50 for its Facebook stock.
We think that there is a considerable margin of safety in this stock. Even if its investments were to be valued at zero, the fund would still trade at a discount to its net asset value. And should the fund continue to make wise investments as it has so far, with stakes in companies such as Facebook, Yelp (both acquired before the companies went public), and Twitter, we believe that when the fund begins to deploy its cash in large amounts, the investments will be accretive to NAV in the long run.
A Note of Caution & Conclusions
While we are bullish on shares of the Firsthand Technology Value Fund in the long run, we must note that there is a good deal of volatility in the stock, as demonstrated year-to-date. And because there are no options available for the stock, there is no way to directly hedge the shares. Therefore, those who wish to add to or initiate positions in this stock have a choice to make: either hold it for the long run, choosing to ride out volatile periods, or trade in and out of the stock.
That being said, we think that shares of the Firsthand Technology Value Fund present a great deal of value. The company is trading not only at a large discount to its net asset value, it is trading at a discount to its cash balance. Market irrationality can cut both ways. It can send stocks soaring to both unrealistic highs and unrealistic lows. And we think that the market has sent shares of the Firsthand Technology Value Fund to unrealistic lows. Now that the mania surrounding the Facebook IPO has passed, the Firsthand Technology Value Fund can be evaluated on the basis of its own merit. And what we have found gives us confidence that the investors who add to or initiate positions in the stock at this point in time should do well over the long run.
Additional disclosure: We may initiate a long position in the Firsthand Technology Value Fund in the next several days.