Blink and you’ll miss it.
That’s how it felt with the complete collapse of Silicon Valley Bank (SVB or ticker: $SIVB).
Instead of having the typical ‘Investor Events & Global Affairs’ section below — we’re breaking down the bust of the largest bank since the global financial crisis of 2008.
If you’re not in the reading mood, here’s some links to a 1-min video explanation by yours truly: Instagram | TikTok | YouTube
1️⃣ What’s the high-level summary of what happened?
On Wednesday, SVB announced that it had sold securities at a loss and that it would also be selling $2.25 billion in new shares to shore up its balance sheet.
This caused loud bells to ring in the heads of venture capitalists — who pretty much called any company that they were connected with who used SVB to pull their money out, catalyzing a “bank run.”
By Friday morning, shares of SVB were halted and the company was placed “in receivership under the Federal Deposit Insurance Corporation (FDIC)”… which means their assets are now under the control and direction of the FDIC.
The order of priority for the FDIC is:
Insured depositors > Uninsured depositors > Lenders > Equity holders
2️⃣ What was Silicon Valley Bank’s big mistake?
SVB bought over $80 billion in mortgage backed securities (MBS) with an expected annual return between 1% and 2%. They essentially locked up tens of billions in long-term fixed assets that paid close to nothing — which started to lose value on the secondary markets as the Fed raised rates.
How could they be so stupid and do that?
Great question, and we agree with the sentiment.
What they portrayed to investors as wise long-term investments — was really a miscalculation of epic proportions.
SVB seemed to be completely ignorant to interest rate risk impacting their position. Highly recommend clicking that link and watching the 90-second video explaining what interest rate risk is.
If short-term treasuries can score you 5%+ on your cash — why would anyone want your illiquid, lower-yielding securities?
In SVB’s defense — below were the Fed’s December 2020 projections of where 2023 rates would be. This Summary of Economic Projections (SEP) from the Fed was surely one of the key supporting materials for SVB’s decision at the time.
Here’s a cool gif showing how the Fed’s rate target ranges changed over time. It’s led to the growing narrative of “The Fed lied, banks died.”
In our view — this was really stupid risk management on SVB’s end, with very limited perspective on how serious inflationary pressures would grow over time (which led to rapid rate increases).
3️⃣ Where does venture capital come into play here and what stocks are impacted?
The vast majority of Silicon Valley Bank’s clients are startups — or former startups that IPO’d and made it big.
For example, clients range from Payoneer (PAYO) & LendingClub (LC) to Rocket Lab (RKLB) & Roku (ROKU).
In fact — Roku had ~26% of all the company’s cash and cash equivalents held in SVB. That’s nearly half a billion dollars.
As VC funding slowed down, SVB experienced four consecutive quarters of “client cash burn” — because VC money wasn’t actively flowing into the companies that banked with SVB:
SVB’s over-concentration of clients being in the startup space created danger for the bank as rising interest rates made it much harder for VCs to continue shoveling billions into startups.
4️⃣ What’s up with SVB leadership?
It didn’t help the situation that their company press release certainly wasn’t very well received. SVB announced new stock sales in an attempt to shore up its balance sheet — just as the shutdown of crypto bank Silvergate Capital was announced.
It looks like leadership knew that some bad things were on the horizon…. their CEO sold $3.6M of stock in the two weeks leading to the bank failure:
And don’t forget about the company’s CFO, CMO, and other C-Suiters — most of whom dumped substantial amounts of their holdings:
5️⃣ Why are people trying to get their money out if they’re FDIC-insured?
FDIC Insurance only covers up to $250K.
The vast majority of deposits in Silicon Valley Bank (93% based on where you get your data) — were uninsured and not reimbursable from the FDIC.
6️⃣ What happens now?
Some folks like Mark Cuban insist that the Fed must buy the bank.
Bill Ackman is pleading that the government must guarantee SVB deposits.
Janet Yellen shared her thoughts on SVB’s collapse here.
Regional and niche banks are worried that there will be a flight to only the largest banks and treasuries.
Hundreds of startups are waiting in limbo as to how they’ll make payroll this week.
7️⃣ Should you be worried personally about your money in the bank?
There’s no need to panic, but this should light a fire underneath you to pay closer attention moving forward.
This is not a repeat of 2008 — especially because SVB was unique in the fact that their depositors were mainly startups, not everyday people like you and me.
The real question is how many banks have charts that look like the ones above — with steadily declining insured deposits.
Diversification of where your cash is parked is the best step forward. And if you’ve got over $250K sitting in one bank account (nice) — you may want to consider doing something about that.
If you’re a business owner, consider moving your money out of a regional bank and instead into one of the “too big to fail” banks like JPMorgan Chase.
Responsibly investing the money is usually the easiest route. At least it’s definitely easier than doing what NBA Superstar Giannis Antetokounmpo did: open 50+ bank accounts.
More likely than not, the best move for you is to relax and not overreact.
Assess where your money is currently parked, and research the financial health of those institutions themselves.
Personally, I’m parking my savings in government-backed Treasury bills that pay 5.3% — learn more about that here.
We’ll be here to provide more updates and opinions as they come!
Key Earnings Announcements:
Dick’s Sporting Goods raised their dividend by +105%, Crowdstrike reaffirmed $5B in ARR by 2026, and Oracle is spending billions on data centers.
Dick’s Sport Goods (DKS)
Key Metrics
Revenue: $12.4 billion, an increase of +0.6% YoY
Operating Income: $1.4 billion, compared to $2.0 billion last year
Profits: $1.0 billion, compared to $1.5 billion last year
Earnings Release Callout
“In 2023, we will grow both our sales and earnings through positive comps, a return to square footage growth and higher merchandise margin.
Our consistent performance and financial strength position us to increase the rate of investment in our business to fuel long-term growth opportunities, and also return significant capital to shareholders.
The step-change increase in our dividend clearly reflects our strong conviction in our structurally higher sales and earnings."
My Takeaway
Dick’s Sporting Goods (DKS) was certainly a pandemic beneficiary — as the company was able to more than triple their earnings-per-share (EPS) since 2019.
Despite the 3X in EPS, Wall Street still expects DKS to continue to grow their top-line revenue substantially over the coming three years — catalyzed by share gain in footwear, athletic apparel, team sports, and golf.
The company has done a wonderful job of returning capital to shareholders — having just announced a +105% increase to their quarterly dividend and repurchasing 610K shares of common stock for $66M.
Looking forward, DKS plans to close 12 Field & Stream stores and convert them into House of Sports stores throughout 2023 — as well as convert +100 additional Dick’s stores to include premium full-service footwear.
Despite the more favorable dividend, store expansion efforts, and $1.4B left to be used in share repurchasing — I’m hesitant to get overly excited about this company. Their stock trades around 12X forward earnings, which is historically their “fair value” sweet spot.
Now don’t get me wrong, there certainly is the argument that DKS stock can become valued more in-line with other scaled retail leaders like Costco, Walmart, Target, etc. but DKS sells disproportionately more discretionary goods when compared to those retailers — opening the opportunity for a miss on earnings if we fall into a hard recession in 2023.
I also already have exposure to the “sporting goods” category through Academy Sports and Outdoors (ASO) — stock pitch here.
Crowdstrike (CRWD)