The stock market can be a humble place – just ask Masayoshi Son.
Son’s reputation as an investment fighter led in 2017 to launch the SoftBank Vision Fund, the largest venture capital portfolio ever. With a goal of $100 billion, Masa focused the Vision Fund on companies ready to capitalize on the widespread adoption of artificial intelligence software.
The approach has had wild ups and downs, as seen in SoftBank’s stock. Less than two years later Barron’s When SoftBank appeared in a bullish cover story in July 2019, its stock had more than doubled as technical valuations rocketed and the company aggressively bought back shares. But pressured by some bad bets and the broader tech stock decline, the stock has since lost all those gains and then some, losing about 13% since our story ran.
The Vision Fund, and a smaller sequel called Vision Fund 2, have invested in 47 companies that have gone public, including:
(XM) and Slack, later acquired by
(CRM). But there have also been embarrassing missteps, such as a dramatic over-dedication to…
(WE) that resulted in billions of losses, and an investment in financial technology borrower Greensill, which has collapsed and shut down.
This year’s bear market in technology stocks was the toughest test yet for SoftBank and the underlying thesis that bigger is better when it comes to startup investments.
Last week, SoftBank reported losses of $24 billion, including losses of approximately $20 billion in the two Vision Funds combined. The difficult quarter reduced Vision Fund 1’s cumulative return by nearly a third, to $20.4 billion, on a total investment of $87.7 billion. Launched in 2019, Vision Fund 2 now has a cumulative loss of $9.3 billion on investments of $49.1 billion.
At a press conference last week, Masa apologized for the poor performance. “I am quite ashamed and remorseful,” he said. The company’s funds have now slowed their pace of new investments.
One of the major frustrations for investors in SoftBank stocks is that the company’s underlying value has almost always been much higher than its stock price. SoftBank owns chip design company Arm Holdings; bet in both
T-Mobile USA (TMUS)
(DTE.Germany); a significant minority stake in
(9434.Japan), a wireless telecom provider; the asset manager Fortress Group; a Japanese baseball team; its share of Alibaba; nearly $35 billion in cash; and various other trinkets. And that’s before the two Vision Funds: the company contributed some of the capital in the first Vision Fund and all of the money in Vision Fund 2. At the end of the June quarter, SoftBank’s net asset value was $139 billion, roughly double its current market value.
In a rare interview with Barron’s in May 2021, Masa said: “Investors are still not confident in our ability to continuously make upward profits. We have to prove ourselves in the coming years.”
But the lingering mismatch between asset value and stock value suggests that Masa’s SoftBank experiment has failed, at least as a publicly traded company. There has been speculation that Masa could take the company privately. The idea has strong merit.
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Going private could make work easier. For starters, SoftBank could end the practice of providing the public with a quarterly update on the performance of its venture capital funds, highlighting their short-term results. Private companies are not required to report results, so they don’t. The question is whether Masa could financially close a go-private deal. The math suggests it’s achievable.
A wild card is the IPO of Arm, which SoftBank bought in 2016 for $32 billion. Arm has grown significantly since its acquisition of SoftBank six years ago, but let’s be conservative and assume it will be valued at $30 billion in an IPO. Add the company’s $35 billion in cash, its remaining Alibaba stake, the proceeds of an eventual sale of Fortress (SoftBank seeking a buyer), and approximately $10 billion in telecom holdings left over from a previous investment in Sprint, and you have cash assets that far exceed current market value. Still hidden in the Vision Fund are stakes in start-ups that could one day have major exits, including TikTok mother ByteDance, sportswear company Fanatics and logistics provider Flexport, among many others.
Alternatively, SoftBank could choose to simply wait for the current downturn. At some point, the IPO market will reopen and tech stocks are likely to return to favor.
New Street Research analyst Pierre Ferragu points out that SoftBank has a high-quality asset portfolio and continues to repurchase shares at a 50% discount to NAV. His view is that “with only a partial recovery in the Vision Fund,” the stock could easily double from here.
Write to Eric J. Savitz at [email protected]