SoftBank Group Corp. Risks Repeating Past Mistakes

seekingalpha05-15

SoftBank is shifting its focus to AI, with a particular emphasis on specialized semiconductors.The company plans to challenge Nvidia with a $100 billion project called Izanagi.SoftBank's debt levels ...

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Risks Repeating Past Mistakes","media":"seekingalpha","content":"<div>\n<p>SoftBank is shifting its focus to AI, with a particular emphasis on specialized semiconductors.The company plans to challenge Nvidia with a $100 billion project called Izanagi.SoftBank's debt levels ...</p>\n\n<a href=\"https://seekingalpha.com/article/4693418-softbank-group-corp-risks-repeating-past-mistakes\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>SoftBank Group Corp. 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Risks Repeating Past Mistakes\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-15 21:11 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4693418-softbank-group-corp-risks-repeating-past-mistakes><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>SoftBank is shifting its focus to AI, with a particular emphasis on specialized semiconductors.The company plans to challenge Nvidia with a $100 billion project called Izanagi.SoftBank's debt levels ...</p>\n\n<a href=\"https://seekingalpha.com/article/4693418-softbank-group-corp-risks-repeating-past-mistakes\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IE00BKDWB100.SGD","symbol_name":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5H\" (SGDHDG) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4693418-softbank-group-corp-risks-repeating-past-mistakes","article_id":"2435658386","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/982368862/image_982368862.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2435658386","pubTimestamp":1715778674,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"SoftBank is shifting its focus to AI, with a particular emphasis on specialized semiconductors.The company plans to challenge Nvidia with a $100 billion project called Izanagi.SoftBank's debt levels i","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"IE00BKDWB100.SGD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5H\" (SGDHDG) ACC","LU0234572021.USD":"高盛美国核心股票组合Acc","IE00BMPRXR70.SGD":"Neuberger Berman 5G Connectivity A Acc SGD-H","SOBKY":"Softbank Corp.","IE00BMPRXN33.USD":"NEUBERGER BERMAN 5G CONNECTIVITY \"A\" (USD) ACC","SFTBF":"Softbank Group Corp","SFTBY":"软银集团","BK4543":"AI","BK4527":"明星科技股","LU0175139822.USD":"AB FCP I Global Equity Blend A USD","IE00BWXC8680.SGD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5\" (SGD) ACC","LU0061474705.USD":"THREADNEEDLE (LUX) GLOBAL DYNAMIC REAL RETURN \"AU\" (USD) ACC","BK4141":"半导体产品","NVDA":"英伟达","BK4550":"红杉资本持仓","SFBQF":"Softbank Group Corp","BK4588":"碎股","BK4503":"景林资产持仓","BK4551":"寇图资本持仓","LU0289960550.SGD":"AB FCP I - GLOBAL EQUITY BLEND PORTFOLIO 'A' (SGD) ACC","IE00B1BXHZ80.USD":"Legg Mason ClearBridge - US Appreciation A Acc USD","IE00B3M56506.USD":"NEUBERGER BERMAN EMERGING MARKETS EQUITY \"A\" (USD) ACC","LU0061475181.USD":"THREADNEEDLE (LUX) AMERICAN \"AU\" (USD) ACC","LU0276348264.USD":"THREADNEEDLE (LUX) GLOBAL DYNAMIC REAL RETURN\"AUP\" (USD) INC","IE00BFSS8Q28.SGD":"Janus Henderson Balanced A Inc SGD-H","ARM":"ARM Holdings Ltd","03160":"华夏日股对冲","BK4549":"软银资本持仓","ARM.AU":"Anax Metals","IE0009356076.USD":"JANUS HENDERSON GLOBAL TECHNOLOGY AND INNOVATION \"A2\" (USD) ACC","LU0289739343.SGD":"SUSTAINABLE GLOBAL THEMATIC PORTFOLIO \"A\" (SGD) ACC","LU0348723411.USD":"ALLIANZ GLOBAL HI-TECH GROWTH \"A\" (USD) INC","IE00BFSS7M15.SGD":"Janus Henderson Balanced A Acc SGD-H","BK4529":"IDC概念","LU0234570918.USD":"高盛全球核心股票组合Acc Close","LU0238689110.USD":"贝莱德环球动力股票基金","IE0004445239.USD":"JANUS HENDERSON US FORTY \"A2\" (USD) ACC","IE00BJJMRX11.SGD":"Janus Henderson Balanced A Acc SGD","BK4532":"文艺复兴科技持仓","LU0053666078.USD":"摩根大通基金-美国股票A（离岸）美元","LU0072462426.USD":"贝莱德全球配置 A2","LU0082616367.USD":"摩根大通美国科技A（dist）","GB00BDT5M118.USD":"天利环球扩展Alpha基金A Acc","LU0079474960.USD":"联博美国增长基金A","BK4567":"ESG概念","LU0056508442.USD":"贝莱德世界科技基金A2","BK4585":"ETF&股票定投概念","BK4534":"瑞士信贷持仓","LU0061474960.USD":"天利环球焦点基金AU Acc","LU0308772762.SGD":"Blackrock Global Allocation A2 SGD-H"},"translate_title":"软银集团公司面临重蹈覆辙的风险","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"ARM":1,"SOBKY":1,"SFTBY":1,"SFTBF":1,"SFBQF":1,"NVDA":1,"ARM.AU":1,"03160":0.6},"content_text":"SoftBank is shifting its focus to AI, with a particular emphasis on specialized semiconductors.The company plans to challenge Nvidia with a $100 billion project called Izanagi.SoftBank's debt levels in conjunction with its vulnerability to Yen weakness pose a significant risk.Also, the company seems to employ an approach similar to what it attempted with the Vision Funds.SoftBank's \"Pepper\" robot. VTT Studio/iStock Editorial via Getty Images Earlier this week, SoftBank Group Corp. (OTCPK:SFTBF) (OTCPK:SFTBY) released its annual report for FY2024 (ending March 31st). The company is increasingly focused on AI, with a particular emphasis on semiconductors. However, I believe that The general approach remains largely the same as in the past few years, with all the downsides that entails. Below, I am explaining my thesis and why I continue to rate SoftBank as a sell. Kindly note that there are two companies with similar names: SoftBank Group, the parent, and SoftBank Corp. (OTCPK:SFBQF) (OTCPK:SOBKY), its telco subsidiary. Following, \"SoftBank\" will refer to SoftBank Group, unless otherwise stated. \"SoftBank KK\" refers to the telco subsidiary. Q4 Takeaways SoftBank's fiscal Q4 and full-year results paint a somewhat mixed, but, in my opinion, not overly negative picture. The Vision Funds segment once again posted a quarterly loss. That notwithstanding, the company overall reported a quarterly profit of around $2.1 billion. While that was not enough to offset losses recorded in the first half of the fiscal year, it marks the second consecutive quarterly profit after a string of net losses. Previously, I have pointed to the risks that a weak Yen relative to especially the Dollar poses for SoftBank. The earnings underline this. Foreign exchange losses amounted to ¥703.1 billion (around $4.5 billion at the time of writing) which the company explicitly attributes to the impact of the weaker Yen, as it did not possess enough Dollar-denominated liquidity to meet Dollar-denominated liabilities. Focus on AI SoftBank is increasingly shifting the focus of its business towards AI in the broader sense. To that end, the company is investing heavily in data centers. SoftBank appears on track to have the largest computing power in Japan by 2025, at an estimated cost of ¥150 billion (close to $1 billion). That capacity is intended to develop a Japanese language large language model. Additionally, the company is conducting investments in various AI-related companies. For example, they were the lead investor of a $1.05 billion series C round for British driving automation company Wayve. Recently, SoftBank also filed a tender offer for outstanding shares of subsidiary SB Technology Corp., which offers some AI-related services. Izanagi A core area of AI-related growth is specialized semiconductors. Presently, the clear leader in that field is Nvidia Corp. (NVDA). However, SoftBank has plans to mount a challenge via a project code-named Izanagi after a Japanese creator deity. To that end, SoftBank wants to invest in the vicinity of $100 billion. According to Bloomberg information, the company hopes to raise around 70 percent of that sum from outside investors, particularly from the Middle East. For comparison, that is an order of magnitude akin to another Vision Fund. While the sum is certainly impressive, a project like this is not without risks. It should be noted that Nvidia does not have a moat for no reason. I caution against viewing it as a foregone conclusion that its years-long lead can be closed by throwing money at it alone. And even if the technological challenge can be overcome, that is no guarantee of economic success at this great investment. Allow me to share a more general, somewhat philosophical, thought: if SoftBank is able to catch up to Nvidia at an economically reasonable cost, so can, presumably, others, thus eventually commoditizing AI chips. Arm As I have stated before, I believe that Arm Holdings plc (ARM) is of central importance to SoftBank's valuation. In November, I envisioned the possibility of SoftBank selling down Arm shares in order to generate Dollar liquidity, once the 180-day lockup period ended. That has, so far, not come to pass. Given where the Arm stock trades at - contrary to my expectation, it more than doubled since - I do not expect that to change in the near term. Instead, I deem SoftBank far more likely to borrow against its stake in order to monetize it. As per reports, Arm is even eying launching its own chips (to be manufactured by contractors), with SoftBank contributing to the cost of development. Given SoftBank's focus on all things AI, I expect Arm's foray into the development of architectures specifically tailored to the needs of such applications to further increase its importance for the group as a whole. In this regard, the subsidiaries rather lofty valuation - Arm trades at a forward PE multiple of around 70, almost double what even Nvidia sells for - might pose a certain downside risk. Lack of Direction A focus on AI is not unreasonable in and of itself. What gives me pause, however, is that in typical SoftBank fashion, the company appears to be investing left and right in anything remotely related to AI without a clear concept. And, once again, it intends to do so on at a larger scale than anyone else. SoftBank is footing part of the cost of Arm's foray into chip-making, according to Nikkei information. Based on the respective strategies, Arm and Izanagi will eventually be competitors to a certain degree. This, on a side note, might create some potential conflict of interest in the future. On top of that, SoftBank is apparently showing an interest in acquiring Graphcore, which has a similar focus (admittedly, that acquisition, if it came to pass, might be integrated into Izanagi). To make matters worse, at a certain scale, this kind of parallel investment risks creating and/or fueling a bubble in the first place. Ironically, the best example for such an occurrence is what SoftBank did with the Vision Funds in terms of driving valuations for late-stage tech (in the broadest sense of the word) companies. Nikkei further reports of plans to set up and operate its own power plants in order to provide electricity for the data centers equipped with SoftBank-developed chips. Now, I do not deny that vertical integration has its merits. Neither, in fairness, is SoftBank entirely without pre-existing know-how in the space having a dedicated subsidiary, SB Energy, that specializes in solar power generation. However, I would caution that power plants come at the cost of significant capex. All in all, SoftBank's new strategy reminds me of SoftBank's old strategy, just with a somewhat narrower focus on AI instead of technology overall. As the saying goes, history does not repeat itself but often rhymes. Debt and Rates There is one crucial difference to what SoftBank did with the Vision Funds from 2017 onward: money has a significant price once more. That, obviously, does not bode well for a company with interest-bearing debt to the tune of around $42 billion at current exchange rates. Cash and equivalents were ¥6.2 billion (around $40 billion) as of March 31st, but that is a consolidated figure. This quarter alone, about $2.6 billion's worth of bonds paying around 2 percent interest on average are maturing. If the latest bond issue dating to April 19th is any indication, the interest rate on refinancing would be a good deal higher. And keep in mind that multi-billion-dollar investments require, well, billions of dollars. Those funds have to come from somewhere. Thesis Risk Naturally, there is no guarantee that I am right. Theoretically, SoftBank could end up the undisputed leader, vertically integrated leader in the AI business. In that case, it might amount to being the \"everything company\". The upside in such a scenario would, obviously, be massive. Also, the Yen might reverse course and appreciate relative to the Dollar, thereby turning a vulnerability onto a strength. I may not have any indication of that coming to pass anytime soon, but then again, if I had a crystal ball capable of accurately predicting currency movements, I would probably be writing about currency trading instead of SoftBank (or, more likely, be a retired billionaire by now). Lastly, there is always the possibility of a \"lucky shot\" emerging from among the plethora of investments. Conclusion SoftBank, historically, has reinvented itself more than once. What started as a software reseller morphed into a telco business, then an investment conglomerate. This time around, I do not think that the changes are quite as profound. Instead, I see the same general approach being applied to a new, or rather narrowed, field. All that is happening in materially less benign macro conditions, particularly in terms of the interest environment. Arm has performed stronger than I expected (albeit not so strong that it would justify its current valuation). It therefore justifies a somewhat higher price. Meanwhile, SoftBank's stake remains unchanged. As is my belief that the best method to value SoftBank is by the sum of its parts with reasonable discounts applied to reported valuations. I am therefore once more revising my price target from previously $34 to $38 to $36 to $40 per share of common stock (note: the ADRs represent ½ share each). That notwithstanding, I maintain my sell rating, as the stock still has about 33 to 40 percent downside from current levels.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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