The line between tactical investments and risky bets

Stocks Sep 23, 2020 / Reading Time: 4 mins
By Cameron Gupta Reading Time: 4 mins

SoftBank sells Arm for Stake in Nvidia

SoftBank announced it would be swapping its $40 bn ownership in Arm, for a $21 bn stake in software company Nvidia. This is possibly the priciest semiconductor sale seeing that Masayoshi Son only purchased Arm for $31 bn back in 2016. “This is a company I always admired for the last 10 years… this is the company I wanted to make part of SoftBank. I am so happy”, said Son. So why the sale? Being one of the largest conglomerates with multiple investments in technology, infrastructure, energy and the financial sector, Softbank reported an $18 bn loss in its Vision Fund for 1H20, meaning the company would need to attend to its liquidity and solvency issues and potential bankruptcy risk. The purchase was made for SoftBank to explore new markets and attempt to dig deeper into the US and technology markets. Looking forward, nothing can happen for at least 2 years until the acquisition contract is complete, however, many analysts say the GPU technology will dominate the smartphone market and almost all smartphones in the future will be equipped with these chips.

 

Vision Fund

Some of the Vision Funds largest holdings include WeWork and Uber which reported heavy losses due to the COVID-19 pandemic. In Q2, Uber saw gross bookings decline by 35% YoY, dropping from $65 bn in FY19 to $10 bn in Q2 2020. Similarly, total trips and monthly active users dropped significantly by 56% and 44% respectively. The heavy losses were vastly triggered by the lockdown measures taken by most countries around the world, not the mention the fear of travel once restrictions were lifted. WeWork didn’t reveal much detail regarding its earnings; however, it did reveal a cash injection of $1 bn from parent company SoftBank. It is likely the cash will be used to cover short term losses in revenue and cash flow and to support a healthy balance sheet to survive the rest of the year. The negative financials were driven by the 3 million people who live and work in New York, who were forced to work from home in the past few months. Although New York makes up almost 20% of WeWork’s portfolio, now that restrictions are starting to ease, WeWork and Uber could regain traction in the coming months.

 

The outlook for Vision Fund remains foggy due to the large investment SoftBank is making into its holdings and subsidiaries, considering its recent track record. Of its 88 portfolio companies, 50 posted an aggregate $21 bn decline in fair value over the period, outweighing the $3 bn of growth across 19 countries. CNBC mentioned the sheer magnitude of the loss was larger than any other tech investment fund including those of Silicon Valley. Both SoftBank and the fund came into the COVID environment struggling, with heavy debt burdens and unhealthy balance sheets. The most recent example of this is when the Vision Fund sold $21 bn of its stake in T-Mobile. Instead of reviewing SoftBank’s portfolio, Son has announced the company will be launching a second fund called Vision Fund 2, where $38 bn would be injected to support more large bets on Wall Street. Coupled with the news of several high-ranking employees leaving the Vision Fund and SoftBank, including Jack Ma, the company continues to focus on the short-term with a seemingly unclear path for the long-term.

 

Talks of Privatisation

Speaking of long-term strategies, SoftBank executives are reviewing their wider vision for SoftBank: shifting its strategy away from being a Japanese conglomerate, following the large asset disposals. The discussions were based around the privatisation of SoftBank due to the equity value trading at a deep 45% discount to its book or fair value, with mid-March discounts expanding to 73%. Son displayed frustration at the company’s equity value being less than the value of the individual holdings as the company sees itself increasingly as an investor and asset manager rather than a direct operator of businesses.

 

Why would SoftBank go private? SoftBank’s equity value would potentially start reflecting its book value, closing the discount gap that currently exists. Another incentive is substantial cost savings since there would be fewer shareholders to attend to, as well as fewer regulatory requirements. This allows for more resources to be devoted to research and development, capital expenditures and more free cash flow. Given SoftBank is the second weighted stock in the index, the news saw the share price of SoftBank rise due to perceived incentives and potential premiums being offered, triggering a short rally for the week.

 

Billion Dollar Options Trade

SoftBank was once again making headlines, with a multi-billion dollar out-of-the-money call option buying spree. The company snapped up options in major tech names like Tesla, Amazon, Microsoft, and Netflix, potentially driving up valuation in the sector. SoftBank declined to comment on the reports however it is clear the company is gradually shifting its strategy to that of hedge funds. This move paused the rally of SoftBank’s privatisation news, and extended losses that week, wiping out over $12 bn in market value for the week. SoftBank’s total market cap fell to $112 bn that session, down 3% from its $124 bn market cap. It seems SoftBank is constantly making the risky decisions with its short and long-term strategies, acquisitions, and investments since its IPO in 2018 and investors should be wary if it continues going down this path.