Looking for Profits in Tech? Read This
It’s no secret that the technology sector offers strong growth potential. But even tech stock investors were surprised at just how much these companies’ stocks could go up. Due to the COVID-19 pandemic, a lot of people have to work, play, and learn from home, and the tech companies that help make these things possible have been enjoying soaring share prices.
To give you an idea, year to date, Zoom Video Communications Inc (NASDAQ:ZM) skyrocketed 254%, Amazon.com, Inc. (NASDAQ:AMZN) soared 65%, Apple Inc. (NASDAQ:AAPL) surged 53%, Netflix Inc (NASDAQ:NFLX) climbed 46%, and Microsoft Corporation (NASDAQ:MSFT) went up 30%. Notably, Amazon, Apple, and Microsoft now each command over $1.0 trillion of market capitalization.
In fact, these tech stocks have outperformed a lot of companies from defensive industries during the pandemic.
But I wouldn’t call them the new defensive plays.
Don’t get me wrong, I like tech profits as much as the next guy, and I was writing extremely bullish theses on Amazon, Netflix, Apple, and Microsoft back when these stocks were trading sideways in 2015.
However, I have to point out that investing in tech stocks does involve a degree of risk. First of all, technology is fast-changing in nature and, in many cases, the companies’ market positions are not 100% secure.
For instance, a company may be making a perfectly good product on its own, but if a competitor comes up with something that’s more appealing, it could render the first company’s product obsolete very quickly. Just take a look at how the “iPhone” destroyed the “BlackBerry,” or how “Facebook” killed “Myspace” and you’ll see what I mean.
Second, if you invest in one of the hottest tech stocks today, you are basically buying something after it shot through the roof. Rallies don’t always last forever, and very often, stocks will experience some pullbacks after a long bull run. A lot of mega-cap tech stocks—like the ones mentioned above—have strong fundamentals, but going forward, chances are there will be ups and downs.
And if you go with the lesser-known tickers, things could be even more risky. Use a stock screener and you’ll easily find lots of tech companies trading at penny stock levels.
Admittedly, investing in tech companies before they become behemoths is one of the most lucrative strategies—think of buying Microsoft stock in 1986 or Amazon stock in 1997. However, not every tech stock will become the most dominant player in its industry, and historically, there have certainly been more companies that didn’t make it than ones that did.
Moreover, the startups with the most potential are often private, and hence not really accessible to the average retail investor. For instance, if you wanted to invest in Facebook in 2008, you simply couldn’t; Facebook didn’t become a public company until 2012.
In other words, unless you are a venture capitalist, you are probably going to miss out on many of the up-and-coming technology opportunities.
And that’s why today I want to talk to you about TriplePoint Venture Growth BDC Corp (NYSE:TPVG).
TriplePoint Venture Growth BDC Corp
Technically speaking, TriplePoint Venture Growth Stock is not a tech stock. Instead, the company is a provider of financing solutions across all stages of development to tech, life sciences, and other high-growth companies.
In TPVG’s own words, its objective is to “Generate current income with preservation of capital along with the potential for additional return through equity ‘kickers’ in the form of warrants.” (Source: “Investment Strategy,” TriplePoint Venture Growth BDC Corp, last accessed August 18, 2020.)
TriplePoint Venture Growth BDC Corp was founded in 2013 and completed its initial public offering (IPO) in 2014, so it is a relatively new name to stock market investors. However, its sponsor—TriplePoint Capital LLC—has been in business quite a bit longer and is actually one of the leading players in global venture finance.
To give you an idea, TriplePoint Capital LLC has provided financing for over 400 companies, including widely recognized tech names like YouTube, Facebook, Inc. (NASDAQ:FB), Jet.com Inc (OTCMKTS: JTCMF), Chegg Inc (NYSE:CHGG), Workday Inc (NASDAQ:WDAY), Square Inc (NYSE:SQ), and Etsy Inc (NASDAQ:ETSY). (Source: “Investor Presentation Quarter Ended June 30, 2020 ,” TriplePoint Venture Growth BDC Corp, August 5, 2020.)
Essentially, TriplePoint Venture Growth BDC Corp was created to expand the venture-growth-stage business segment of TriplePoint Capital LLC. And the venture debt business is quite lucrative.
TPVG generally provides short-term financing—usually between three and four years—and the borrower is typically preparing for an IPO or being acquired in one to three years. When underwriting these loans, the company is targeting a loan-to-enterprise value below 25%, so there is a considerable margin of safety.
The targeted returns are usually between 10% and 18%. And because of warrants and prepayments, TPVG has the potential to generate additional returns on top of earning oversized interest income from the loans.
Looking at the company’s portfolio, TriplePoint Venture Growth BDC Corp had debt investments in 37 portfolio companies, warrants in 61 portfolio companies, and equity investments in 21 portfolio companies as of June 30. Lending is by far TPVG’s biggest business, as debt investments represented more than 94% of its total portfolio fair value at the end of June.
The weighted average annualized portfolio yield on those debt investments was a hefty 13.7% in the second quarter.
What’s even more interesting, though, is how the company delivers returns to its investors.
Usually, tech stock investing is about buying low and selling high. And when tech stocks are shooting through the roof—like what they’ve been doing over the past few years—the strategy can work very well.
But as I said, not all tech stocks will be long-term winners, and big swings do come in both directions.
With this particular “tech stock” though, there is actually a way to earn a sizable return without worrying about the ups and downs in share price: through dividends.
I know, there are quite a few tech companies with regular dividend policies, but TriplePoint Venture Growth BDC Corp still stands out because it is required by law to distribute at least 90% of its profits to investors through dividends.
Why? Because it chooses to be regulated as a business development company (BDC) under the Investment Company Act of 1940. In exchange for following that mandatory distribution requirement, BDCs pay little to no income tax at the corporate level.
How generous are the dividends?
Well, right now, the company has a quarterly dividend rate of $0.36 per share—that’s $1.44 per share annualized. With TPVG stock trading at $12.44 per share, it offers an annual dividend yield of 11.6%.
Let that sink in.
The average dividend yield of S&P 500 companies is just under 1.8% at the moment. (Source: “S&P 500 Dividend Yield,” multpl.com, last accessed August 14, 2020.)
In other words, TriplePoint Venture Growth stock is yielding more than six times as much as the average S&P 500 company. And if you look specifically at the technology sector, it’s hard to find companies that yield even close to the double-digit mark.
The neat thing about dividends is that they are paid by the company to its shareholders. That is, you don’t need a soaring stock price to earn a return. For instance, when TPVG stock tumbled during the market sell-off earlier this year, its shareholders still got paid $0.36 per share every quarter. (Source: “stock information,” TriplePoint Venture Growth BDC Corp, last accessed August 14, 2020.)
Of course, dividends come from profits. In order for investors to keep earning oversized cash returns from this tech play, the company needs to keep generating profits. And since the second quarter of 2020 was an extremely difficult period for a lot of businesses due to the impact from the COVID-19 pandemic, let’s see how this technology financing firm was doing in the extraordinary environment.
Well, the result was a nice surprise. In the second quarter of 2020, TriplePoint Venture Growth BDC Corp funded $20.5 million in debt investments to seven portfolio companies, with a weighted average annualized portfolio yield at origination of 14.4%. (Source: “TriplePoint Venture Growth BDC Corp. Announces Second Quarter 2020 Financial Results,” TriplePoint Venture Growth BDC Corp, August 5, 2020.)
The BDC also earned net investment income of $0.38 per share, which was more than enough to cover TriplePoint Venture Growth stock’s quarterly cash dividend of $0.36 per share.
If you look further back, you’ll see that the company’s net investment income has grown quite a bit since its inception.
(Source: “Investor Presentation,” TriplePoint Venture Growth BDC Corp, August 5, 2020, op. cit.)
Due to their distribution requirement, BDCs tend to have high payout ratios. However, because TriplePoint Venture Growth has been churning out some very impressive numbers over the years, it has built up approximately $8.9 million, or $0.29 per share of spillover income (as of June 30). That money could be used to support additional distributions in the future.
And even though the pandemic has not ended quite yet, the business environment seems to be improving for TPVG.
In the company’s latest earnings conference call, Chairman and Chief Executive Officer James Labe said, “With the initial shock of COVID and its impact having been worked through. We’re now getting deals done. We are busy deploying increased amounts of capital and handling this increasing origination activity and look forward to a strong finish for the year.” (Source: “TriplePoint Venture Growth (TPVG) CEO James Labe on Q2 2020 Results – Earnings Call Transcript,” Seeking Alpha, August 6, 2020.)
At the end of the day, there are a lot more exciting tech stocks than TriplePoint Venture Growth BDC Corp, and if you are good at timing, trading those tech stocks can be more lucrative than collecting dividends.
However, for investors who don’t want to time the markets and don’t like volatility, TPVG stock’s oversized dividends could provide a relatively safe way to get some exposure to the booming tech sector.