The 2022 bear market created an incredible opportunity to buy excellent companies at discounted prices. SVB Financial Group (SIVB.Q) is one such company, trading down 67% since the start of 2022.
The Silicon Valley-based bank caters to innovative start-ups and saw its valuation take a hit as those customers saw funding dry up during the year. However, it's an attractive stock for investors, trading at its cheapest valuation in over a decade.
This cheap valuation gives SVB Financial excellent upside potential with some margin of safety. Here's why you should consider adding this growth stock to your portfolio today.
The bank to start-ups delivered stellar growth
SVB Financial provides banking services to start-ups across industries like technology, life science, healthcare, private equity (PE), and venture capital (VC). Its focus on start-ups has been a crucial driver of long-term growth. Since 2007, the bank's interest-earning assets grew from $6 billion to $210 billion in 2022 -- or about a 27% annual growth rate. Long-term investors who held the stock saw their shares grow an impressive 383% since then.
In 2021, the bank was boosted by robust PE markets and VC activity. Pandemic-related stimulus and ample liquidity made debt abundant and cheap, which caused a surge in dealmaking. Last year, VC dealmaking broke records, with over $300 billion in new deals and fundraising of over $100 billion. Since then, things have taken a turn for the worse for the bank of the innovation economy.
SVB's primary customer saw funding dry up during the year
Coming into 2022, investors were focused on inflation and, more importantly, the Federal Reserve's response to it. The Fed committed to raising interest rates to put a lid on inflation and raised its interest rates beginning in March and from near-zero to up to 4.5% by year-end -- one of the fastest paces of interest rate increases ever.
This matters to SVB because it caters to Silicon Valley customers and has a high balance of noninterest-bearing deposits (deposits it holds but doesn't have to pay interest on). That's because when start-up customers raise funds from PE firms or VC firms, they put those funds into their SVB bank accounts.
SVB Financial's primary customers saw funding dry up in 2022. According to Crunchbase, VC funding has dropped steadily throughout the year, and in the third quarter, VC dollar volume dropped 53% year over year. As a result, SVB's deposit base has shrunk significantly in the last year, with noninterest-bearing deposits falling by 25% from Dec. 31, 2021, to Sept. 30, 2022. This fall in deposits caused management to revise its outlook several times during the year -- and this uncertainty roiled investors, who saw shares drop 67%.
SVB's cheap valuation gives investors excellent upside potential for when markets recover
SVB stock traditionally traded at a premium to other banks because of its outstanding returns. In the last decade, its return on equity of 14.7% outpaced its banking peers, including JPMorgan Chase and Bank of America.
However, SVB's sell-off created an excellent buying opportunity for long-term investors. Its valuation is near its lowest in over a decade, as measured by things like price-to-tangible book value, price-to-sales ratio, and price-to-earnings ratio.
SIVB Price to Tangible Book Value data by YCharts
The bank will likely face volatility in the short term, with most economists expecting a recession in the next 24 months. However, as a top bank for up-and-coming start-ups, SVB Financial is well positioned for when funding rebounds.
When markets eventually recover (every bear market has given way to a bull market), SVB's cheap valuation puts it in a position for excellent upside that should continue to deliver over the long term.
