Softbank Group Corp founder Masayoshi Son, running the world’s biggest venture capital fund, is making waves again.
Softbank has sold its entire stake in Nvidia Corp for US$5.8 billion, renewing concerns that tech valuations have become frothy. This transaction marks a U-turn for Son. As recently as March, Softbank was busy buying up the artificial intelligence (AI) chip designer’s shares. Nvidia’s stock has risen 44 percent this year and is now trading at 42 times earnings, versus about 35 times a year ago.
While it is healthy to ask if an AI bubble is forming, it would be premature to consider Softbank’s sale as a sign of a market top. Son is no Warren Buffett.
Softbank has been dabbling in public markets in the past few years, a sharp departure from its core business of spotting unicorns. In late 2020, it started a controversial hedge fund side hustle called SB Northstar. This unit bought billions of dollars of US equity derivatives, stoking market volatility and earning Softbank the nickname of “NASDAQ whale.” However, by early 2022, Northstar had to be scaled down dramatically after incurring a cumulative loss of ￥746 billion (US$4.83 billion).
A poor track record aside, Son has desperate financing needs. Softbank is racing to lock down its equity investment in OpenAI. In March, it led a funding round at a premoney valuation of US$260 billion, promising to invest US$30 billion by year-end. It has put in only US$7.5 billion.
To raise money, Softbank offloaded T-Mobile US shares, sold senior and hybrid bonds, and expanded margin loan facilities backed by Arm Holdings PLC. Including the Nvidia sale, the conglomerate has obtained US$30 billion in net financing this year, just enough for the OpenAI investment.
Son has to complete the deal to sustain Softbank’s earnings. For the third quarter, the Japanese company reported a surprise net income of ￥2.5 trillion, far outrunning the average analyst estimates of ￥418 billion. Sam Altman’s start-up played an essential role. Softbank booked a US$12.8 billion fair value gain from its OpenAI shares.
To justify this accounting maneuver, Softbank said that at OpenAI’s latest employee share sale, which closed last month, the unicorn was valued at US$500 billion, almost double its entry point. However, more than half of this unrealized profit came from forward contracts, which might have to be reversed if Softbank is unable to close its follow-on investments by next month.
Son has been rewarded handsomely for his AI investments. Softbank’s shares hit a record high last month, in large part because it controls ARM, known for licensing central processing unit architecture to partners such as Nvidia. The Japanese firm reported its best quarterly income in three years thanks to paper gains from its OpenAI shares. As a result, Son might double down, looking at billion-US-dollar acquisition targets.
On the other hand, Son’s ambition is not backed by deep pockets. As Softbank gets busy reshuffling its massive portfolio, the company would have to sell the most liquid assets on hand to fund Son’s shopping spree. Nvidia was not the first and it is not going to be the last.
In 2020 when Softbank was making huge derivatives bets, traders complained that its entry into the stock market was dangerous and created extreme volatility. Unfortunately, the NASDAQ whale is back.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder. This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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