The stock market can be a humbling place – just ask Masayoshi Son.
The founder and CEO of
(ticker: SFTBY), “Masa” made one of the best single venture investments of all time, giving a $20 million grubstake to Jack Ma when he started the e-commerce business
Alibaba Group Holding
(BABA) in 2000. That bet has paid off enormously. Even after selling part of its stake, SoftBank still owns $34 billion of Alibaba stock. Masa hasn’t stopped making big bets since.
Son’s reputation as an investment cannon led to the launch of the SoftBank Vision Fund in 2017, the largest venture capital portfolio ever. Targeted to be $100 billion, the Masa Vision Fund focused on companies poised to benefit from the widespread adoption of artificial intelligence software.
The approach has had wild ups and downs – as can be seen in SoftBank’s share. Less than two years after Barron’s highlighted SoftBank in a bullish cover story in July 2019, the stock had more than doubled as technology valuations boomed and the company aggressively bought back shares. But pressured by some bad bets and the broader downturn in tech stocks, the stock has since lost all those gains and then some, losing about 13% since our story ran.
Vision Fund, and a smaller successor 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 dramatic overcommitment
(WE) that resulted in billions in losses and an investment in financial-technology lender Greensill, which has collapsed and shut down.
This year’s bear market in tech stocks has been the toughest test yet for SoftBank and its underlying thesis that bigger is better when it comes to startup investments.
Last week, SoftBank reported a loss of $24 billion, including losses of about $20 billion combined in the two Vision Funds. The difficult quarter reduced accumulated returns on Vision Fund 1 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 weak performance. “I’m quite embarrassed and remorseful,” he said. The company’s funds have now slowed down for new investments.
One of the major frustrations for investors in SoftBank stock is that the company’s underlying asset value has almost always been far higher than its share price. SoftBank owns chip design firm Arm Holdings; stakes in both
T-Mobile USA (TMUS)
(DTE.Germany); a significant minority stake in
(9434.Japan), a wireless telecommunications provider; wealth management firm Fortress Group; a Japanese baseball team; its Alibaba stake; close to $35 billion in cash; and various other small things. And that’s before the two Vision Funds: The company contributed part of the capital in the first Vision Fund and all the cash in Vision Fund 2. At the end of the June quarter, SoftBank’s net worth was $139 billion, about double its current market value.
In a rare interview with Barron’s in May 2021, Masa said: “Investors still don’t trust our ability to continuously create good upside. We have to prove ourselves in the next few years.”
But the continued disconnect between asset value and stock value suggests that Masa’s SoftBank experiment has failed, at least as a public company. There has been speculation that Masa could take the company private. The idea has strong merit.
Going private could make the job easier. First, SoftBank could stop the practice of providing quarterly updates to the public on the performance of its venture funds and focus on their short-term performance. Private venture companies have no requirement to report results – so they don’t. The question is whether Masa could financially make a go-private deal. The math suggests that it can be done.
A wild card is the IPO for Arm, which SoftBank bought for $32 billion in 2016. Arm has grown significantly since SoftBank’s acquisition six years ago, but let’s be conservative and assume it gets a $30 billion valuation in an IPO. Add in the company’s $35 billion in cash, the remaining Alibaba stake, proceeds from a possible sale of Fortress (SoftBank is seeking a buyer) and $10 billion or so in telecom stock left over from an earlier investment in Sprint, and you’ve got cash assets far above the current market value. Still tucked away in the vision fund are stakes in start-ups that could one day have big exits, including TikTok parent company ByteDance, sportswear company Fanatics and logistics provider Flexport, among many others.
Alternatively, SoftBank could choose to simply wait out the current downturn. At some point, the IPO market will reopen, and tech stocks will likely regain favor.
New Street Research analyst Pierre Ferragu points out that SoftBank has a high-quality asset portfolio and continues to buy back shares at a 50% discount to net asset value. His view is that “with only a partial recovery in the Vision Fund” the stock can easily double from here.
Write to Eric J. Savitz at firstname.lastname@example.org