SVB Financial Group (SIVB.Q -50.00%), the parent company of Silicon Valley Bank, just put the final touches on an incredible 2021. However, the leading banker to the "innovation economy" has taken a hit along with other tech stocks in recent weeks, falling more than 20% from all-time highs. This comes not just despite a great fourth-quarter 2021 earnings report but also an upgrade to full-year 2022 guidance and the prospect of higher interest rates in the next year -- one of the primary ways banks earn income.
However, SVB management expressed confidence in the niche of clients it serves during the last earnings call. With 2022 looking like it will be a fantastic year for this investment bank, the recent market volatility tees up a fantastic buying opportunity for the stock.
Catering to a suddenly out-of-favor group of businesses
SVB Financial provides services to what it calls the innovation economy: disruptive start-ups in technology and related fields as well as the founders, key employees, and venture capital investors of such start-ups. In addition to providing various banking, lending, and investment services, SVB often invests directly in these up-and-coming private innovators -- yielding SVB shareholders an indirect investment in many of the companies that eventually go public via the IPO process.
That investment banking niche served SVB well during 2020 and 2021, since many of these high-growth businesses were garnering record levels of investment in the private equity market. A record pace of IPOs the last two years certainly helped, too. As a result, SVB stock skyrocketed 170% higher from the beginning of 2020 to the end of 2021. The company's recent earnings tell the story. Full-year 2021 earnings per share increased 37% year over year, a fantastic growth rate for the usually sleepy banking industry.
However, with the Federal Reserve indicating interest rates will rise this year, a lot of hot air is being let out of the high-growth area of the business world. Higher rates lower the future value of cash flows, so high-growth company valuations are among some of the most sensitive to expected changes in interest rates. This explains the steep declines many tech stocks have suffered in recent months, dragging down SVB with them.
Data by YCharts.
Growth stock volatility will not be SVB's undoing
During the Q4 2021 earnings call, some analysts expressed concern over recent market volatility and rising rates. Worry has mounted that investment activity in the innovation economy could decrease amid a higher-rate environment, which could put a damper on SVB's income this year.
Management expressed confidence in its trajectory, though, even providing upgraded full-year 2022 guidance -- net interest income is now expected to grow at a high 30% rate, compared to a low 30% rate before. Though valuations of fast-growing businesses might take a hit, higher rates do benefit lenders. Plus, as CEO Greg Becker said on SVB's earnings call, venture capital firms raised a record amount of cash last year, and "there's so much dry powder, and they need to put it to work." While volatility has struck growth markets lately, SVB is seeing little sign of a slowdown on the tech investing front.
The innovation economy is still growing rapidly, market volatility and interest rate hikes aside, putting SVB Financial on track for another great year. With the stock currently trading for less than 18 times expected 12-month earnings, this is still the only traditional banking stock I'm interested in owning. Plus, SVB's confidence in the current state of affairs in the venture capital realm bodes well for investors in other high-growth tech stocks that are making headway in disrupting the status quo. Stock market volatility is inevitable, but that certainly does not mean the long-term rationale for staying invested is finished.
