Investors in GSV Capital (NASDAQ: GSVC ) should be applauding the recent surge in Twitter (NYSE: TWTR ) shares. The leading platform for instant communication recently hit new highs, surging to $52, which should propel the NAV of GSV higher.
GSV Capital is a publicly traded investment fund that provides individual investors the opportunity to invest in a basket of high-growth, venture-backed private firms. The stock surged initially in early 2012 based on the Facebook excitement, but it eventually plunged along with Facebook and the other social media stocks.
Recently, it surged again, this time backed by the IPO gains of Twitter. Based on apparent speculation that Twitter would plunge in the after-market similar to Facebook, GSV recently plunged from $17 to nearly $10. Ironically, Twitter turned and headed to highs while GSV continued falling until the recent positive news on another large investment.
Are investors too busy focusing on losing positions and fearing a Twitter collapse that didn't happen?
Too focused on losing positions
The benefit of investing in GSV is that the basket of risky investments reduces the risk of an individual stock blowing up. Investors, though, appear to be stuck focusing on the losing positions instead of the total change in NAV.
A couple of high-profile, negative IPOs from Chegg (NYSE: CHGG ) and Violin Memory (NYSE: VMEM ) helped offset the Twitter momentum, though the losses in these two positions haven't come close to erasing the $70 million gains in Twitter. Remember that the combined positions of Chegg and Violin were only $30 million at original cost. Clearly, failures in these previous top 10 positions aren't positive, but investors need to expect losses from time to time.
Violin Memory could be a lost position with the company reporting substantial losses and disappointing guidance for the fourth quarter. GSV made an original investment of $15 million or roughly $12 a share. The stock has plunged to below $4 and the remaining $5 million investment is at risk of a total loss. The company did raise $146 million in the IPO, but the third-quarter loss of $25 million is highly concerning.
Chegg has potential
On the other hand, Chegg had a disappointing IPO, but the company appears at the forefront of an evolution in education tech. The stock was priced at $12.50 and closed the first day at $9.68. The market doesn't like that Chegg is losing money, but it offers some catalysts, including the potential to become the social collaboration site for higher education students.
The model is unproven, and the ability (and willingness) to shift from the original focus of textbook rentals to online services has investors concerned. The move to eTextbooks and other services such as the ability to organize, plan, rate, and read reviews about college courses and professors could be an invaluable service. Another potential tool allows students to obtain help with homework from direct textbook solutions and direct response via questions to experts. Despite all of these cool features, though, the company reported a $21 million loss during the first half of 2013.
A crucial aspect of this stock to GSV is the percentage of the fund investments that are in educational tech. The ability to prove out this model could have a major impact on other top 10 positions like 2U, Avenues World Holdings, and Coursera.
Another big gainer
The news that the second largest position in the fund recently got a 50% value bump should help the stock overcome the nervousness over what appeared to be several collapsing positions. Last week, several media outlets reported that Palantir Technologies, the cyber security software provider that counts the CIA and FBI among its clients, got a 50% increase in valuation to $9 billion. In September, GSV valued the Palantir position at $26 million, or 10.3% of NAV. GSV owns over 7.1 million common shares and 326,797 preferred shares.
Assuming GSV valued its position in Palantir based on the $6 billion funding in September, the position would've increased in value by $13 million. Such a move would easily offset any losses generated by Chegg and Violin Memory during the quarter.
GSV ended the third quarter with a NAV of $13.16, and the roughly $67 million combined gains in Palantir and Twitter swamp any small losses in other positions. Counting the losses in Chegg and Violin Memory, the NAV has increased nearly $3 during this quarter to reach around $16. With the stock trading below $11 in the last week, investors are clearly focusing too much on the losing positions. The stock offers an interesting value for those investors willing to ignore the noise.
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