It's been a treacherous year for the innovation economy as many start-ups saw their valuations take a shellacking. SVB Financial (SIVB.Q 2.00%), the parent company to Silicon Valley Bank, saw its shares take a hit in a big way in 2022 as falling tech stock valuations and tepid venture capital markets weigh on the business. That short-term performance definitely weighed on the stock, but it's SVB's long-term success that keeps this bank an intriguing stock for investors to consider.
SVB Financial's stock is down about 56% from its November 2021 peak and trades near its lowest valuation in a decade. With its stock down significantly, it's worth asking: Can SVB Financial bounce back in 2023? Here's what needs to happen to make that a reality.
Its primary customers have seen funding drop dramatically
In addition to Silicon Valley Bank, SVB Financial runs SVB Capital, SVB Private, and SVB Securities. These businesses cater to start-ups, providing banking services, investing, and investment banking to these companies worldwide. Its role in the innovation economy cannot be understated. According to data from PitchBook, almost half of U.S. venture-backed technology and life science companies bank with SVB.
Unfortunately for SVB Financial, the last year has been brutal for young innovative companies. For one, start-ups and companies that went public in recent years have seen valuations plummet. For example, the Renaissance IPO ETF, which aims to track new IPOs, is down nearly 62% since November 2021. Not only that, but funding in the world of venture capital (VC) dropped drastically. According to Crunchbase, global VC funding was $445 billion last year, down 35% from record levels in 2021.
On the one hand, last year's funding was still higher than pre-pandemic levels. However, the 35% pullback in funding was more significant than the pullbacks during the Great Recession of 2008 or the dot-com bubble, according to Preqin and reported by Bloomberg. Funding in the fourth quarter of last year was down a whopping 59% year over year, the worst quarter since the first quarter of 2020 when the pandemic began.
For SVB Financial, this translates into a 19% decline in diluted earnings per share (EPS) and a decline in non-interest-bearing deposits of 36%.
Here's what you can expect in 2023
For SVB Financial's business to bounce back, it needs to see improving conditions in the VC and private equity funding markets. But don't expect this to happen in the first half of the year.
According to CEO Greg Becker, the bank expects another 10% to 20% decline in VC in the first half of 2023. The second half could see a modest pickup in funding, but it won't be charging back with a vengeance. Instead, deals will trickle in, and financing will slowly return to start-ups.
More stability in the market would be a welcome sign for SVB Financial and start-ups. Investors are hoping that the Fed will slow down, and possibly stop, the pace of its interest rate hikes this year. This could provide more stability for the broader economy and give start-ups more stable valuations that firms are comfortable investing at.
Its valuation makes it appealing, but I want to see this first
SVB Financial's history of outperformance and cheap valuation makes it an attractive stock. The company trades at a ridiculously cheap valuation with a price-to-tangible book value (P/TBV) of 1.46. Over the last 20 years, its P/TBV has averaged around 2.3.
SIVB Price to Tangible Book Value data by YCharts.
The bank of the innovation economy will likely face a tough first half as funding continues to drop. SVB Financial wants to see funding conditions improve in the second half of the year, with firms becoming more comfortable investing at current valuations.
While I won't be building a position in the bank quite yet, I'll be closely watching the VC funding markets and start-up communities for signs of improving conditions. When funding does come back, SVB Financial is in an excellent position to bounce back in a huge way.
