The SoftBank Experiment Has Failed. Here’s What Comes Next.

Son’s reputation as an investment gunslinger led to the 2017 launch of the SoftBank Vision Fund, the biggest venture-capital portfolio ever. Targeted to be $100 billion, Masa focused the Vision Fund 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 stock. Less than two years after Barron’s featured SoftBank in a bullish cover story in July 2019, the stock had more than doubled, as tech valuations boomed and the company aggressively bought back shares. But pressured by some bad bets and the broader downturn in technology shares, the stock has since lost all of those gains and then some, with a loss of about 13% since our story ran.

The Vision Fund, and a smaller sequel called Vision Fund 2, have invested in 47 companies that have gone public, including DoorDash (DASH), Uber Technologies (UBER), Qualtrics International (XM), and Slack, later acquired by Salesforce (CRM). But there have also been embarrassing missteps, like a dramatic overcommitment to WeWork (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 start-up investing.

This 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 nearly 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 news conference this past week, Masa apologized for the weak performance. “I am quite embarrassed and remorseful,” he said. The company’s funds have now slowed their pace of new investments.

One of the great frustrations for investors in SoftBank shares is that the company’s underlying asset value has almost always been far higher than its stock price. SoftBank owns chip design firm Arm Holdings; stakes in both T-Mobile US (TMUS) and Deutsche Telekom (DTE.Germany); a substantial minority stake in SoftBank Corp.
(9434.Japan), a wireless telecom provider; the asset-management firm Fortress Group; a Japanese baseball team; its Alibaba stake; close to $35 billion in cash; and various other bits and bobs. And that’s before the two Vision Funds: The company contributed a portion of the capital in the first Vision Fund and all of the cash in Vision Fund 2. At the end of the June quarter, SoftBank’s net asset value was $139 billion, about twice its current market value.

In a rare interview with Barron’s in May 2021, Masa said, “Investors still don’t trust our ability to continuously make 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 could take the company private. The idea has strong merit.

Going private could make the job easier. For one thing, SoftBank could end the practice of providing quarterly updates to the public on the performance of its venture funds, spotlighting their short-term results. Private venture firms have no requirement to report results—so they don’t. The question is whether Masa could financially engineer a go-private deal. The math suggests that it’s doable.

One wild card is the initial public offering for 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 that it gets a valuation of $30 billion in an IPO. Add in the company’s $35 billion in cash, the remaining Alibaba stake, proceeds from an eventual sale of Fortress (SoftBank is seeking a buyer), and $10 billion or so in telecom holdings left over from a prior investment in Sprint, and you have liquid assets far exceeding the current market value. Still hidden away in the Vision Fund are stakes in start-ups that could one day have big exits, including TikTok parent ByteDance, the sports apparel company Fanatics, and logistics provider Flexport, among many others.

Alternatively, SoftBank could choose to just wait out the current downturn. At some point, the IPO market will reopen, and tech shares are likely to regain favor.

New Street Research analyst Pierre Ferragu points out that SoftBank has a high-quality asset portfolio, and it is continuing to buy back stock 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 eric.savitz@barrons.com