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Want Access to Pre-IPO Tech Stocks? This Bank Has You Covered

By Nicholas Rossolillo – Nov 3, 2021 at 8:23AM

Key Points

  • SVB Financial's net income was up 73% year over year through the first nine months of 2021.
  • The early outlook for 2022 suggests double-digit increases in loan and deposit balances and fee income.
  • This isn't a cheap bank stock, but it's a fast-growing one that yields indirect exposure to dozens of private companies before they go public.

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SVB Financial's blowout Q3 2021 looks poised to carry over into 2022 and beyond.

The number of IPO stocks hitting the market has hit a record pace in the last couple of years. However, by the time these high-growth businesses go public and are available for purchase by the average investor, valuations are often sky-high. Is there a way to get in on the action before the IPO?

One way to do so is via SVB Financial Group (SIVB 2.31%), better known as Silicon Valley Bank. This financial institution gears its services toward what it calls the "innovation economy," giving owners of the stock exposure to various pre-IPO companies. Here's why it's a must-know bank for those that want to invest in early-stage fast-growing tech outfits.

Someone holding a smartphone to access digital banking services.

Image source: Getty Images.

An old-style bank, but so much more

Silicon Valley Bank boasts about half of all U.S.-based venture capital-backed tech and life science companies as customers. Of those that went public during the first half of 2021, SVB says 63% of them are on its client roster. Given the rapid rate of new stocks that have IPO'd, this has worked wonders for SVB. After its Q3 2021 update, net income and earnings per share are up a respective 74% and 63% through the first nine months of the year compared to 2020.

Granted, with $191 billion in total assets and $371 billion in client funds, this is no small regional bank. On the contrary, this is now a financial institution with global scale. SVB serves private equity firms, start-ups, and early-stage companies and their owners in hubs of economic innovation worldwide. Loans and business banking services make up the bulk of SVB's income, but it also owns equity in many of the firms it has banking relationships with. Though traditional banking is not exactly a growth industry, SVB is itself a high-growth firm because of the fast-moving nature of the niche it targets. It also recently completed the acquisition of Boston Private to bolster its client investment and wealth management segment.

Exposure to the wild world of private equity and start-ups doesn't necessarily increase this banking firm's risk, either. Pre-pandemic, SVB's tier 1 leverage ratio (equity, earnings, and reserves divided by a bank's assets) was an incredibly strong 9.1. As of Q3 2021, that ratio had dipped to 7.8, but anything above 5.0 is considered a strong financial position for a bank.

Reasonably priced for the long-term

Some investors might shy away from SVB at this point because the stock price is up 190% since the start of 2020, and nearly 500% over the last five-year stretch. And with a trailing 12-month price-to-earnings ratio of 22, this is no cheap bank stock. 

But there's good reason for the premium compared to other traditional banking firms. Management released its preliminary outlook for 2022, and it was exceptional. SVB expects mid-20% and mid-40% year-over-year growth in average loan and deposit balances, respectively, which it thinks will equate to a mid-30% increase in interest income. Fee income from things like client investment and wealth management, foreign money exchange, and credit card fees is expected to grow at a mid-20% rate year over year. Suffice to say SVB thinks it will have yet another great year in 2022.

If early access to pre-IPO stocks and private equity is what you're after, SVB Financial Group is a rock-solid play on the industry. Through its client relationships, it yields access to dozens of tech firms long before they hit the market as a publicly traded stock. With the "innovation economy" expanding at a rapid rate and expected to continue for the foreseeable future, this bank stock still looks like a great buy.

SVB Financial provides credit and banking services to The Motley Fool. Nicholas Rossolillo and his clients own shares of SVB Financial Group. The Motley Fool owns shares of and recommends SVB Financial Group. The Motley Fool has a disclosure policy.

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