Despite tech stocks' strength, SoftBank anticipates Q4 loss.

TraderKnows
TraderKnows
05-11

Despite robust tech stock performance, SoftBank Group foresees another Q4 loss. Investors await growth investment hints, but SoftBank remains cautious. Reliance on Arm amidst ample liquid assets may pose risks.

Japanese technology investment firm SoftBank Group is expected to report another loss on Monday when it announces its earnings, despite a strong performance this quarter by tech stocks, including its key asset Arm Holdings (NASDAQ: ARM).

Investors and analysts are also looking forward to hints about new growth investments as SoftBank has ample liquidity and the ability to monetize its substantial stake in Arm.

After strong performance data in February, the stock price of Arm, headquartered in the UK, doubled, sparking excitement among investors about Arm's future earnings, as Arm is expected to benefit from the adoption of generative Artificial Intelligence (AI). However, Arm's stock price does not directly affect SoftBank's profits, as Arm is a subsidiary of SoftBank.

Furthermore, SoftBank's other listed assets had mixed performances this quarter—Coupang and DoorDash (NASDAQ:DASH) saw their stock prices rise, but the stocks of Didi Global and Grab Holdings dropped. The Initial Public Offering (IPO) market remains sluggish, making analysts uncertain about the prospects for monetizing SoftBank's portfolio of unlisted technology startups.

According to the average forecast of two analysts at the London Stock Exchange Group (LSEG), SoftBank is expected to report a net loss of 72 billion yen (approximately $462.7 million) for the January to March period, compared to a net profit of 985 billion yen in the previous three months.

SoftBank's management has stated that they are prepared for new growth investments, but emphasized a cautious approach. Although there were fewer new investments in the October to December quarter, analysts have suggested that a major controlling acquisition similar to the $32 billion purchase of Arm in 2016 may be under consideration.

Calculations by Shogo Tono, a credit analyst at Nomura Securities, show that SoftBank could raise up to $30 billion through a combination of cash on hand at the end of 2023, proceeds from bonds issued in March, and margin loans on its Arm holdings. However, the dominant position of Arm in SoftBank's investment portfolio carries risks, as a shift in market sentiment could affect SoftBank's value and fundraising abilities.

Currently, compared to competitors like Nvidia (NASDAQ:NVDA), Arm's valuation premium is much higher, accounting for nearly half of SoftBank's net asset value.

Some analysts warn that this situation is unsustainable. Javier Correonero, an analyst at Morgan Stanley, estimated that Arm's fair value is $57 per share, while its recent trading price was around $100 per share.

Investors were disappointed with Arm's annual revenue forecast in its quarterly results on Wednesday, leading to a drop in its stock price by as much as 8.5% the following day, highlighting significant repricing risks.

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