After a period of setbacks, when prospects are shrouded in fog or completely disappear into impenetrable darkness, Masayoshi Son seems to have received a reason for positive news about the activities of the SoftBank Group Corp. headed by him, which is that this business structure plunged into one of the best quarters in recent years and recorded profits for the first time in more than a year.
The mentioned investment company, which is based in Tokyo, is expected to report that it made a net income of 373 billion yen ($2.5 billion) between October and December last year. This positive result, which has become a symbolic ray of light for SoftBank Group, signaling that a successful future is possible, is partly due to a gain on the stake in T-Mobile USA Inc. and a growth in the value of startups in the Vision Fund portfolio. Astris Advisory experts expect the Vision Fund to announce a profit of 111 billion yen for the fourth quarter of 2023, which will be the largest figure since June 2021.
Masayoshi Son’s most valuable holding, which is Arm Holdings Plc, has seen growth of over 40% since its public offering in New York last year. This profit will not be recorded in the SoftBank Group’s income statement due to complex accounting rules but will contribute to the value of the company’s net assets, one of Mr. Son’s favorite indicators for assessing the state of the investment firm he heads.
Arm’s result is likely to contribute to the SoftBank Group’s revenue exceeding the $121 billion mark. In the quarter ended in December 2023, the share price of this chip developer rose to a maximum of $77.47 per security. Against this background, Arm’s value has reached the $79 billion mark.
Kirk Boodry, an analyst at Astris Advisory, says that the mentioned result is pretty good progress. Also in this context, he noted that the value of a chip developer is determined by artificial intelligence and will be related to the history of advanced technology.
Arm’s growth was largely driven by expectations that this developer of microcircuits, based in the United Kingdom, would become a significant player in the AI chip manufacturing industry. For semiconductor companies, 2023 was the best year in more than a decade. In this case, the main conquerors of the current technological realities are chip manufacturers which were able to maximize the benefits of artificial intelligence. For example, Nvidia’s share price has more than tripled in 2023. This company became the first chip manufacturer to exceed the $1 trillion value mark.
Arm, which has a huge stake in NAV SoftBank Group, has effectively replaced Alibaba Group Holding Ltd. as the most valuable element in the firm’s portfolio.
The business structure headed by Masayoshi Son is currently afraid of increasing trade tensions between Beijing and Washington. Against the background of these negative realities, which do not contain prospects for an early improvement in the situation, the company is striving to reduce its dependence on China. As part of the implementation of the relevant intentions, SoftBank Group suspended new investments in the mentioned country for several months.
Kirk Boodry says that Masayoshi Son’s strength lies in the fact that, with conviction, he is willing to invest and can borrow a lot of money very cheaply. According to the expert, in the absence of financial injections into Alibaba, SoftBank Group would not have been mentioned in the context of conversations about success. A similar example is investing in Arm.
At the same time, skepticism about the portfolio of the Tokyo-based investment company remains. There are several hundred private startups in the two Vision funds. The second Vision Fund, fully financed by SoftBank Group and Masesi Son personally, is starting to sink into losses after a series of markdowns related to a period of turbulence for technology stocks. The investment company’s own shares cost has fallen by more than 35% compared to its peak in 2021. Currently, these securities are traded at a discount of about 50% to its NAV.
The discount, which is one of the indicators used to gauge the possibility of share buyback, widened in December 2023 as the value of Arm securities increased. Astris Advisory data shows that the discount of 50% or more is the highest since September 2020, when there was a coronavirus pandemic.
Victor Galliano, an independent analyst, the SoftBank Group’s growing dependence on Arm is a reason for caution. According to the expert, the investment company depends on the dynamic of the stock price of the chip developer. Separately, Victor Galliano said that in his opinion, SoftBank Group is not in the same league as, for example, Nvidia.
Kirk Boodry also believes that the rise in the value of Arm shares contains signs of a bubble forming. The expert says that the chip designer’s securities are overvalued at levels above $70 per piece. Kirk Boodry noted in this context that Masayoshi Son should beware of arrogance. According to the expert, at present, the head of the SoftBank Group should not make statements about his correctness regarding the preliminary assessment of Arm’s prospects, since there is a risk of a drop in the share price.
Paul Golding and Emma Liang, Macquarie experts, say that the market undervalues NAV in general, especially now against the background of the growth of Arm and the implementation of T-Mobile options. They note that the current level of discount implies that the market still sees NAV as extremely susceptible to fluctuations in valuations of private Vision Fund firms or to the technology sector, which has a significant decline in public names. According to experts, both contradict what one would expect from a possible improvement in interest rate conditions in the near and medium term.
Mitsunobu Tsuruo, an expert at Citigroup Global Markets, says that the losses of the Vision Fund are decreasing, while the total profit and losses from the valuation of firms not listed on the stock exchange were at break-even in the September quarter. The analyst notes that while economic sentiment remained at the same level, trends in market interest rates were positive for assessing corporate values, especially the reduction in the discount rate used to assess the value of the enterprise.
Marvin Lo and Chris Muckenstrum, experts at Bloomberg Intelligence, say that the increase in profits from T-Mobile shares is not something more sustainable and does not indicate a higher probability of securities buyback. According to them, consensus expects significant earnings growth from Arm, but the corresponding result of the chip developer may be small and could not move forward, given SVF’s swingy pre-tax income of 61 billion yen in the first quarter and losses of 259 billion yen in the second quarter.
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