Friday, July 12, 2024

SoftBank stock hits its first record high in 24 years — Arm and AI helped it get there


Masayoshi Son, CEO of SoftBank, speaks during the company’s annual general meeting in Tokyo on June 20, 2024.

Kosuke Okahara | Bloomberg | Getty Images

SoftBank Group shares hit a record high on Thursday, just as the company’s massive tech investment arm shows signs of recovery and its outspoken founder Masayoshi Son emerged back into the public spotlight to align the Japanese giant to a future in artificial intelligence.

The firm has also been helped by the public market success of British chip designer Arm, in which Softbank has a majority stake.

Shares of the Japanese giant closed at a record high of 11,190.00 Japanese yen on Thursday — a far cry from the dotcom crash of the early 2000s and a more recent downturn for the company during the tech market troubles of 2021 and 2022.

SoftBank’s journey to the peak

Vision Fund

The recent rise to a share price peak has been volatile since Son positioned SoftBank as a visionary pioneer with the 2017 launch of a massive technology investment arm — the Vision Fund.

SoftBank made dozens of bets on tech companies across the world, some of which turned sour. Office sharing startup WeWork was perhaps among the highest-profile names. But some of SoftBank’s investments in Chinese firms also took a hit after Beijing kicked off its crackdown on the domestic tech sector at the end of 2020.

After lingering near then-record highs in March 2021, SoftBank’s stock fell sharply, alongside other global tech stocks. The Vision Fund posted then-record financial losses in 2022. Son said that SoftBank would go into “defense” mode and be more conservative with its investments. He changed tack shortly after the Vision Fund posted a record $32 billion loss in 2023, saying that the company would now shift into “offense,” because he was excited about the investment opportunities in AI.

Jefferies shares its outlook for SoftBank's stock

SoftBank’s share price began a recovery from around May 2023, and the Japanese titan’s Vision Fund more recently posted better financials amid broader tech stock recoveries.

“Softbank Vision Fund had to write down various investments due to a combination of equity values declining and a tougher private financing environment. It looks like the write down cycle is mostly done, and there is a good chance that the IPO market will be more constructive going forward, especially for AI related investments,” Oliver Matthew, head of Asian consumer research at CLSA, told CNBC by email.

Arm chip boost

Several analysts attributed SoftBank’s recent share price bump of around 78% in the year to date to the IPO success of Arm, which it acquired in 2016.

SoftBank owns roughly 90% of Arm even after the listing. Arm shares are up nearly 124% alone this year, as of the close on July 3.

“SoftBank Group’s investment strategy and focus has long included the development of an AI ecosystem portfolio, long before the LLM (large language model)-driven bull cycle in AI-related names over the last 18 months or so,” Paul Golding, senior U.S. lifestyle and payments analyst at Macquarie U.S. equity research, told CNBC by email.

“This vision, in our view, likely drove some of the investment decision in 2016 to acquire Arm, giving SoftBank Group direct exposure to semiconductor market dynamics and ownership of intellectual property around semiconductor design well ahead of broader progress in AI use-cases and platforms.”

SoftBank shares “have been benefitting from this vis-à-vis well-publicized” uses for Arm intellectual property, such as in the automotive industry or cloud data center, Golding added.

Arm CEO Rene Haas talks the impact of AI and smartphone demand

Do investors believe the SoftBank story?

Over the years, investors have focused on whether SoftBank Group’s valuation fairly reflects the assets it is invested in or holds.

For example, SoftBank’s valuation is around $101.5 billion. Arm’s market capitalization is around $176 billion — meaning that SoftBank’s 90% stake is equivalent to about $158 billion of that figure. That alone is significantly above SoftBank Group’s overall valuation, without taking into account the company’s other holdings and businesses, such as its telecommunications arm.

Analysts cite this as a reason why SoftBank’s share price does not reflect its fair value.

Dan Baker, senior equity analyst at Morningstar, said a lot of SoftBank’s price appreciation comes down to Arm.

“I’m not sure that investors are convinced by the SoftBank story again,” Baker told CNBC by email, adding that this year’s share gain is “primarily” because Arm stock has risen, while the Japanese yen has weakened. Baker said it is worth looking at the so-called sum-of-the-parts (SOTP) valuation, which ascribes value to the various parts of SoftBank’s holdings to figure what the company is worth. Baker said the SOTP valuation remains just under 50% this year, meaning SoftBank’s stock does not truly reflect the value of its various businesses and investments.

“So I’m not sure that investors are ‘buying the SoftBank story’ but investors are certainly buying the ARM story,” Baker said.

Investors have also cheered the fact that SoftBank has sold practically all of its shares in Alibaba, the Chinese e-commerce giant that Son backed in 2000.

SoftBank has also likely been helped by a recent broader rise in Japanese stocks, with the Nikkei 225 Index up 22% this year alone as of Thursday.

Artificial super intelligence

SoftBank CEO goes on 'AI offensive' after selling Nvidia too soon

CLSA’s Matthew said SoftBank’s discount could reduce, going forward, thanks to some of the company’s early AI investments.

“Softbank has been absolutely consistent about its investment direction; they were among the earliest investors behind the AI theme, and in some ways too early so many investors thought they were overpaying, or buying into certain companies where it wasn’t clear how AI was related,” Matthew said.

“As a result, Softbank Group shares trade at a surprisingly wide discount to its fair value, and we believe this discount will narrow in the future.”



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