SoftBank Group (OTCPK:SFTBY) is under pressure and the stock price has been crushed recently with multiple headwinds and bad news especially on its China investment. While the sentiment has fallen to the bottom, I still think SFTBY offers tremendous value to shareholders. Here I will update some of my thoughts following the previous article.
1. Alibaba drove SFTBY down
During the last earnings call, CEO Masayoshi said, ‘SFTBY is in the middle of a Blizzard’. The net income decreased from 15.6B to 3.13B USD. The net asset value (NAV), the most important measure for Masayoshi, has a loss of 6B USD falling from 244B to 187B USD last quarter. The major reason behind this is Alibaba (BABA) which consists of 58% of SFTBY NAV in the previous report. As we all know, all Chinese stocks are in a huge regulatory crackdown. Almost all China stocks were crushed heavily as nobody wants to invest in businesses controlled by the communist regime. As the chart below shows, SFTBY’s stock price follows the moves of BABA instead of the overall market such as SPY.
2. SFTBY has transformed its portfolio to a global scale instead of just China
The shrink of BABA has significantly changed SFTBY’s NAV composition. BABA only counts 28% of NAV now. Accounting for all other China investments, SFTBY has 36% of exposure to China, then the US with 20%, Japan, Asia, Europe with 44%. Except for China, investments in other regions actually show steady growth. SFTBY has paused its China investment and may continue for one or two years, so we can expect less and less influence from China in the coming years. Because of this, SFTBY becomes a diversified and global company.
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3. Diversification is actually good for Venture capital companies
Peter Thiel’s book ‘Zero to One’ has introduced a power law regarding VC investing that a small handful of companies will significantly outperform others. According to Founders Fund, the best investment often returns more than the sum of other investments combined. So it is important to have enough diversification instead of being single-minded following a small number of companies.
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It is clear that SFTBY is still at the early stage of its pursuit of AI in this world. With 368 total companies invested so far, it’s not so difficult for one or two to grow to a future AI giant.
4. Cash flow and debt are under control
There was a concern about SFTBY’s debt load since it has made so many investments and most startup companies are burning cash every day. However, even under the extreme China situation, SFTBY’s Loan-to-value (LTV) ratio is still below 25% which shows a sufficient financial buffer. 24.3B cash position is also more than sufficient for future bond redemptions. Moreover, the majority of the debt is domestic bonds or bank loans which could benefit from the long-term rate environment in Japan. We all know that the Japanese central bank has adopted the policy of negative interest rates for several years already.
Source: Softbank presentation
Source: Softbank presentation
5. The WeWork mess is not as disastrous as it appears and most Vision Fund companies are delivering decent returns
The failure of WeWork has gained huge media coverage and previous CEO Adam Neumann was considered a fraud. However, WeWork (WE) has been successfully going public during Nov 2021, SFTBY has only lost 1.5B (0.7X return) on this investment as of now. Many SA authors have written several good bull thesis on WE, so there are no reasons to be overly pessimistic.
If we look at all the listed vision fund companies, the performances are very good. Of course, there are bad losses in companies such as View (0.4x), OneConnect (0.1x), and Zhangmen (0.2x). But there are also profitable investments with huge runways in the future such as Coupang (NYSE:CPNG), By Dash(NYSE:DASH), AutoStore, etc. 13 private Vision Fund Companies ( as of Nov. 5, 2021) have announced plans to go public through IPOs (8) or SPAC mergers (5) which will unlock value and help the market better recognize SFTBY’s hidden assets.
Source: Vison Fund I listed company returns Softbank presentation
Source: Vison Fund II listed company returns Softbank presentation
6. Buying SFTBY is better than buying BABA
Many SA authors have a strong bull thesis on BABA. Charlie Munger also doubled his investment in BABA recently. SFTBY is not a Chinese company but the biggest shareholder of BABA (25%). If you are long BABA, you should consider SFTBY. I think SFTBY provides more diversity and growth prospects than BABA. It has lower risks and Masayoshi Son definitely has better inside information on China than average investors.
7. More uncertainties and bad news may come
Holding so many companies in the early stages, there will be both good news and bad news. The ARM deal may fail next year; More senior executives may leave the company (turnovers always happen in VC); More government crackdowns may happen on Chinese tech companies; Another failed investment like WeWork may appear. All these potential negativities will cause big volatilities to the stock price but also opportunities to buy at a discount.
8. The huge buyback program has offered a cushion for the stock price
SFTBY has approved a 1 trillion JPY (8.7B USD) share repurchase program within one year. With a 52% discount comparing to its NAV value, a large buyback could be a great value creation measure for shareholders. Masayoshi is the largest shareholder of the company with 27+% of the Holding Ratio (I don’t think he has other side gigs). His interest is well aligned with average investors. Therefore, I believe SFTBY has a lot to offer in the long run.