The stock market can be a humbling place – just ask Masayoshi Son.
Founder and CEO of
(ticker: SFTBY), “Masa” made one of the best single venture investments of all time, giving a $20 million grub stake to Jack Ma when he started the e-commerce company
Alibaba Group Holding
(BABA) in 2000. That effort has yielded enormous returns. Even after selling part of its stake, SoftBank still owns $34 billion in Alibaba stock. Masa has not stopped making big bets since.
Son’s reputation as an investment gunslinger led to the launch of the SoftBank Vision Fund in 2017, the largest venture capital portfolio ever. Targeted at $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 shares. Less than two years after Barron’s featured 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 decline in tech stocks, the stock has since lost all those gains and then some, losing about 13% since our story was published.
Visjonsfondet, and a smaller sequel called Visjonsfond 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 over-commitment
(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 investing.
In the past week, SoftBank reported a loss of $24 billion, including losses of about $20 billion combined in the two vision funds. The difficult quarter reduced the cumulative return on Vision Fund 1 by almost a third, to $20.4 billion, on a total investment of $87.7 billion. Vision Fund 2, launched in 2019, 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’m quite embarrassed and regretful,” he said. The company’s fund has now reduced the pace of new investments.
One of the major frustrations for investors in SoftBank shares is that the company’s underlying asset value has almost always been far higher than the share price. SoftBank owns chip design firm Arm Holdings; effort in both
T-Mobile USA (TMUS)
(DTE.Germany); a significant minority share in
(9434.Japan), a wireless telecom provider; asset management firm Fortress Group; a Japanese baseball team; its Alibaba stake; close to $35 billion in cash; and various other bits and pieces. 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 asset value was $139 billion, roughly double that. current market value.
In a rare interview with Barron’s in May 2021, Masa said: “Investors still do not trust our ability to continuously achieve 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 may take the company private. The idea has strong merit.
Going private can make the job easier. First, SoftBank could end the practice of providing quarterly updates to the public on the performance of its venture funds, and put the spotlight on short-term results. Private venture firms are not required to report results – so they don’t. The question is whether Masa could financially construct a private agreement. The math suggests that it is feasible.
One wild card is the initial public offering of Arm, which SoftBank bought for $32 billion in 2016. Arm has grown considerably 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, its remaining stake in Alibaba, 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 liquidity assets that far exceed today’s market value. Still tucked away in the Vision Fund are stakes in startups that could one day have big exits, including TikTok parent ByteDance, sportswear company Fanatics and logistics provider Flexport, among many others.
Alternatively, SoftBank may choose to simply wait out the current decline. 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 could easily double from here.
Write to Eric J. Savitz at email@example.com