For the most part, banks are viewed as victims of the New Economy -- lumbering giants whose core businesses are incapable of rapid growth and whose services aren't so important to the dot-coms investors love. While shares in the New Economy companies soar, bank shares have shed 30% of their values since last summer.
But there's one bank that's capitalizing to the fullest on the high-tech boom:
Silicon Valley Bancshares
. Little known outside tech circles, the holding company of
Silicon Valley Bank
is the ultimate example of being in the right place at the right time -- and making the most of the situation.
Based in Santa Clara, Calif., the bank has been
place for Silicon Valley's start-ups to go for basic banking services, such as commercial credit lines, quick loans and basic money-management services. To compensate for the lack of hard assets a bank would require from a more mature company, Silicon Valley Bank often asks for warrants on shares of its upstart clients. And it's the unrealized gains on those investments that have propelled shares of Silicon Valley Bank to new highs as other banks plunge to new lows.
Silicon Valley's stock, in fact, is the momentum play of the banking industry, more than tripling from 24 last summer to Tuesday's close of 85 5/8. Where it heads next is based on what's happening to those warrants. Today, investors will get a hint, when Silicon Valley Bank plans to issue its regular midquarter report after the markets close. The number analysts will be watching is the value of its unrealized gains, which amounted to about $110 million, or $4.63 per share, at the end of the year. The bank reported earnings last year of just $2.46 per share. In short, this bank is starting to take on the characteristics of an "incubator," that trendy species of investment company valued more for its assets than its profits.
Joseph Morford of
Dain Rauscher Wessels
in San Francisco figures the stock this way: He's predicting earnings of $3 per share this year, and an additional $2.25 per share from gains on warrants. His blended multiple (banking gains plus investment gains) led Morford to a price target of 80 when the bank's shares traded for 65 in mid-February. He says he'll raise his target if the new numbers are significantly bigger. Morford's firm was lead underwriter of a $58.8 million follow-on stock offering for Silicon Valley in December, when the shares traded for 42.
With the explosion of new companies, says Silicon Valley Bank CFO
, the bank has collected more warrants in the last two years than in the previous 15. Lutes notes that at year-end, the bank held warrants in 853 companies, some of which remain among its approximately 2,500 to 3,000 clients.
The bank's sizzling shares could easily flame out, of course. Should the tech market sour, many of the warrants could wind up worthless, and the company would lose the premium it currently gets over other banks.
CFO Lutes says that the bank asks Wall Street to value it primarily on its core activities. But clearly, that's not what's happening. The bank would be worth only $66 if it traded merely for 22 times Wall Street's earnings estimates of $3 per share, a typical multiple. In comparison,
, a much larger regional bank, is worth about seven times its expected 2000 earnings.
And, while Lutes likes to stress the fundamentals, Silicon Valley Bank isn't bashful about collecting on a windfall. After all, its job is to lend money, not sit on gains. One example: It recently sold off a position it originally acquired as a venture investor in
Internet Capital Group
. The bank hasn't reported the size of the gain yet, but at year-end said the profits were worth $42.3 million on a pretax basis. Dain Rauscher's Morford figures that Silicon Valley Bank's unrealized gain in pre-public
is worth at least $7 million.
The Way It Works Dept.
Speaking of Garage.com ... The conferences sponsored by the entrepreneurial coach-for-hire outfit usually sell out well in advance -- at least that's what Garage.com claims. So why, one wonders, is Garage.com spending money on a full-page newspaper advertisement, as it did this week, to promote three upcoming "Bootcamp for Startup" conferences?
The official answer from Geoff Baum, Garage.com's director of marketing, is that the ad in the
San Jose Mercury News
is the result of a barter transaction surrounding a previous sponsorship by the regional newspaper. But for those in the know, it's a no-brainer that the Palo Alto, Calif., company gets an added bonus from such spots: Garage.com also is advertising its
Pros call this a "valuation marker" and it's also a favorite technique of private companies that have raised money recently. The ad can't arouse the suspicion of the
Securities and Exchange Commission
because it truly is promoting a business activity Garage.com's been at well before the IPO.
But the prominent publicity won't hurt, either, when Garage.com asks the public to consider its shares in coming weeks. Baum, the marketing executive, declined to comment on the latter assertion. Natch.
Congratulations and best wishes are in order to my former colleague, Scott Herhold, who this week began his new
"stocks.comment" column in the
San Jose Mercury News
. Herhold's a veteran newshound who's covered everything from cops and robbers to regulators and venture capitalists (note the symmetry), and I'm betting tech-stock investors are going to find his biweekly insights a must read. One of his pledges: He'll pay more attention when research analysts lose their enthusiasm for a stock than when they're talking it up. Good idea, Scott.
Adam Lashinsky's column appears Tuesdays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at