The Importance of SoftBank’s Results on The Technology Sector
The Softbank Group evolved from a Japanese telecommunications business to one of the world’s most prominent holding companies. In line with its ‘300 Years of Growth’ strategy, it focuses on investing in technology start-ups and innovative businesses. Will the results for Q1 2022 lead to a revaluation of this approach?
SoftBank’s confidence in technology
In 2017, the SoftBank Group cemented its commitment to the technology sector by setting up the SoftBank Vision Fund, a technology-focused venture capital fund. The fund attracted prominent investors, including Apple, Foxconn and Qualcomm.
The initiative has been detrimental to the conglomerate’s results. Between April and June 2022, the Vision Fund recorded a “depressing” $23bn loss. Masayoshi Son, SoftBank’s Founder, Chairman and CEO, admitted that previous choices should have been ‘more selective.’ The company has now announced that it will cut back on its aggressive investment strategy to soften the exposure of its portfolio.
SoftBank’s new approach
The changes already announced include cutting SoftBank’s stake in Alibaba, the world’s biggest online commerce company. The move is expected to raise $34.1bn. Alibaba has been a particularly volatile investment due to record antitrust fines and the Chinese government’s crackdown on the technology sector. Investors welcomed this as shares in SoftBank rose by 6% upon the announcement.
Lessons for the technology sector
SoftBank’s performance reflects the economic landscape of recent months. A looming recession has been directing investors towards “safer” stocks. Despite the correlation between the Vision Fund’s results and a growing criticism against SoftBank’s strategy, the blame could be attributed to factors beyond the technology sector.
A notable example is SoftBank’s $17bn expenditure on a 56% stake in WeWork. Beyond the unfortunate listing saga of the coworking space provider, SoftBank cut ties with Adam Neumann, the company co-founder and former CEO, through costly settlements in 2021.
SoftBank’s considerable share of borrowings in US dollars contribute to further losses. The weakness of the yen against the dollar in 2022 has already resulted in a foreign exchange loss of ¥820bn.
Despite Alibaba’s troubles, SoftBank’s choices can still be considered lucrative. The conglomerate’s initial $20m investment, made in 2000, was worth $60bn when Alibaba made its IPO debut in 2014. Importantly, SoftBank will reduce its stake in Alibaba through “prepaid forwards contracts.” This derivative mechanism will enable hedging against risk, without selling the shares; retaining the option to buy them back in 2024. The interim move to address Vision Fund’s performance mirrors the temporary pause in the prosperous digital economy.
By: Zuzanna Potocka