SoftBank May Turn Profit After $48 Billion In Vision Fund Losses

(Bloomberg) -- SoftBank Group Corp.'s Vision Fund is likely to return to profitability after five quarters of losses, thanks to an artificial-intelligence-fueled rebound that's lifting startup valuations.

The Japanese conglomerate is fighting to regain its footing after losing ¥6.9 trillion ($48 billion) at the Vision Fund investment unit in the last two fiscal years. Analysts expect a modest profit at the fund for the three months ended June, while SoftBank as a whole will likely report a profit of around ¥73 billion on Tuesday, according to the average of analyst estimates.

Whether SoftBank founder Masayoshi Son will now be able to go on the offensive and hunt for new deals hinges on the initial public offering of Arm Ltd. His chip designer is seeking to raise as much as $10 billion in a market debut as soon as September, at a valuation of between $60 billion and $70 billion. At the high end of its fundraising target, Arm would be the largest tech debut on record after Alibaba Group Holding Ltd. and Meta Platforms Inc.

Obsession over artificial intelligence has sparked a surge in the valuations of Arm's peers. Nvidia Corp.'s value crossed the $1 trillion threshold this year, while the Nasdaq 100, a proxy for tech stocks, recorded its best ever January-June performance this year.

SoftBank gives investors a way to invest in Arm as an AI play prior to its listing, said Kirk Boodry, an analyst at Astris Advisory. “A further run once a public prospectus comes out would not be surprising at all,” he said. 

The Vision Fund's public holdings were up about $1.1 billion in the June quarter, Boodry estimates. DoorDash Inc. and Grab Holdings Ltd. were among the biggest contributors, rallying 20% and 14% respectively during the period. Coupang Inc. advanced 9%. SoftBank's own shares soared 31% during the same period, marking its best such performance in three years. 

In July alone, the unit's public portfolio rose $3.9 billion in value, with DoorDash, Grab and China's Didi Global Inc. all rallying. If SoftBank can sustain that pace for the rest of the quarter, the Vision Fund would book its strongest performance on an aggregate basis since January-March 2021, he said. 

“I'm not convinced we are completely out of the woods yet,” as July's gains may turn out to be ephemeral while “tech seems priced for perfection (again),” Boodry said. Still, the bounce is “worth highlighting,” and Arm's upside should provide support even if the Vision Fund looks weak, he said.

Here is what analysts are saying:

Macquarie (Paul Golding)

• Raised price target on SoftBank by 10% to ¥8,250 in July.
• Sees Arm's valuation at $80 billion, based on an average of various earnings scenarios and applied peer multiples.
• Arm architecture is so ubiquitous across chip designers and manufacturers, it may be more insulated from any broader marketplace woes than its individual customers.
• Vision Fund metrics remain solid as of fiscal 4Q, with 98% of Vision Fund 1 and 90% of Vision Fund 2 firms having more than 12 months of liquidity runway. “This makes for an increasingly de-risked story.”
• Company's four-year average discount to Net Asset Value has been about 45%, but a 37.5% discount is enough, with the Alibaba stake sold down, risky portions mostly written off and major holdings about to become more liquid.

Galliano's Latin Notes (Victor Galliano) 

• SoftBank and Arm's desired valuation of $80 billion implies “a historic price-to-sales multiple of an eye-watering 28.4x.” Such a valuation looks “fanciful,” according to a note published via Smartkarma.
• Nvidia's emergence as a potential anchor investor in the Arm IPO has boosted SoftBank shares, but “there is still a big disparity between groups in terms of Arm's potential valuation.”
• “This big rift in valuation expectations needs to be resolved.” Sees a best-case valuation for Arm in the range of $40 billion to $45 billion, “which would provide a 10% to 15% NAV lift.”

Bloomberg Intelligence (Sharon Chen)

• SoftBank's strong liquidity and lower LTV post-Alibaba monetization will help the company withstand headwinds, while the planned Arm IPO will further stabilize its credit profile.
• Focus is on Arm's valuation and the use of IPO proceeds. “If the company achieves its target valuation of $60 billion to $70 billion in the IPO, this would be positive as it can buy back shares and tender for bonds, while maintaining headroom to invest.”

Bloomberg Intelligence (Marvin Lo) 

• SoftBank may resume investing, but “execution risk remains high,” especially if the valuation of Arm's IPO fails to reach the high end of the $30 billion to $70 billion range.
• Arm's revenue could fall amid destocking of smartphone chips.
• Sees reasonable chance of a new share-buyback program as SoftBank may need to keep its price book-value ratio above 1 to avoid additional listing requirements imposed by Tokyo Stock Exchange.

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