Raging Capital Ventures Profile picture
Jan 18 10 tweets 3 min read Twitter logo Read on Twitter
Silicon Valley Bank $SIVB reports earnings tomorrow

Investors have rightfully been fixated on $SIVB's large exposure to the stressed venture world, with the stock down a lot.

However, dig just a little deeper, and you will find a much bigger set of problems at $SIVB... 1/10
$SIVB rode the VC boom like a champ

Deposits grew from $61 b at Q4 '19 to $189 b at Q4 '21. Interest rates were so low, these deposits were like free money (~25 bps avg. cost). 2/10
$SIVB used these inflows to:

- Increase loans 100% to $66 b

- Go hog wild with its "held-to-maturity" (HTM) securities portfolio, ramping its mostly Agency mortgage holdings from $13.5 b at Q4 '19 to $99 b at Q4 '21.

3/10 Image
$SIVB's big problems are with its HTM portfolio

The bank basically increased its security portfolio by 700% at a generational TOP in the bond market, buying $88 b of mostly 10+ year mortgages with an average yield of just 1.63% at Sept 30th. Oops! 4/10 Image
$SIVB's HTM securities had mark-to-market losses as of Q3 of $15.9 b...compared to just $11.5 b of tangible common equity!!

Luckily, regulators do not force $SIVB to mark HTM securities to market. But the bank would be functionally underwater if it were liquidated today. 5/10 Image
On top of this, due to the Fed's interest rate hikes, $SIVB is seeing accelerating deposit outflows (-6.5% ytd), a mix shift away from non-interest accounts, and skyrocketing interest costs (money markets now yield 4%). Also, $SIVB's venture clients are burning cash! 6/10
Basically, as its funding costs reset higher, $SIVB is facing a massive negative carry cost on its HTM, largely fixed-yield securities portfolio (which is not running off quickly, due to the nature of mortgage convexity). 7/10
The risk for $SIVB is that deposit outflows accelerate at such a pace that it is forced to either raise equity capital and/or sell down its HTM securities portfolio, thus realizing substantial losses. You can bet that $SIVB is praying for a Fed pivot! 8/10
$SIVB's clients also face a risk. With the bank's stretched balance sheet, will it tighten and/or pull back on credit lines? Worse, could customers become uncomfortable with $SIVB as a counter-party, due to unrealized balance sheet losses? 9/10
$SIVB's mgmt has tried to blame its challenges on its venture-related exposure. However, it is hard to hide from the fact that mgmt bought the TOP of the bond market.

Tomorrow's earnings and this year should be interesting.

Caveat Emptor! (Disclosure: I am short) 10/10

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More from @RagingVentures

May 23
Always surprised at $MVIS valuation (newly revived in recent weeks) vs. LIDAR peers, particularly given its weaker balance sheet and lack of apparent/verifiable customer traction.
$MVIS moving higher - now with a roughly $1 b market cap - on $AAPL AR/VR announcement, even though $MVIS is not even pursuing the AR market anymore.
Make that a $1.3 billion market cap. Notably, the CEO of $MVIS shared at the company's Investor Day in April 2023 that he evaluated strategic alternatives when he took over, with a "$1 trillion company" only offering "single-digit million dollars" for the entire business.
Read 5 tweets
Dec 17, 2022

2022 has been a bear, with many stocks down -80%, -90%, -95% or more. At YE, holders are often eager to lock-in tax losses & clean-up their books. So we could see some nice bounces once the selling abates.

Here are a few ideas:
Somalogic $SLGC, $2.26 - A leading platform for proteomics analysis, $SLGC has a $435 mm cap w/ $550 mm+ of cash. $SLGC has cut costs and should burn ~$80-$100 mm in '23, w/ a partnership with $ILMN due to launch in '24. New Exec Chair seems like validation. 1/10
Allot $ALLT, $2.86 - A provider of carrier networking solutions, $ALLT's move into a new consumer facing security biz has been a disaster. Mgmt, however, now appears under pressure to rollback that effort. Core DPI biz is very strong. $110 mm cap with good balance sheet. 2/10
Read 11 tweets
Jan 22, 2022
Having managed money for a long time through many cycles, a few thoughts on how to stay mentally fit when things are tough (as they are now):

— If you’re not sleeping well, or are overly fixated on a position, reduce your exposure(s) so you regain your composure and sanity. 1/6
— A tough market can make you feel like a deer in the headlights (‘08 still feels like y’day). It is important that you remain nimble and can play offense. This, too, means it might make sense to cut some exposure. You don’t have to make it back the same way you lost it. 2/6
— My favorite investing mentor always talked about researching new ideas when you are in a rut or feeling lost. Find something new that you’re excited about, regain the initiative, and don’t dwell on sunk costs. Again, it is ultimately about finding ways to play offense. 3/6
Read 6 tweets

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