SoftBank to face scrutiny of AI strategy at Q2 earnings after sell-off

[TOKYO] SoftBank Group reports quarterly earnings on Tuesday (Nov 10), with investors wondering how much reassurance it will offer about its strategies amid a rout in artificial intelligence stocks and after its takeover of ABB’s robotics unit was blocked by China.

The Japanese tech investment firm’s big bets on AI – particularly the US$64.6 billion it has spent on a 13 per cent stake in OpenAI – have raised questions about how well it will be able to weather setbacks for the sector.

The Democratic Party’s sweeping success in US midterm elections has heightened expectations of regulatory scrutiny and delays to building data centres, increasing scepticism about returns for AI industry.

“The near-term build-out and how exactly everything is going to be financed, whether it can be energised, where it will be deployed, are questions that were much easier to answer six months ago than today,” said Rolf Bulk, head of semiconductors and infrastructure at research firm Futurum Group.

The health of the AI industry has huge implications for SoftBank, which has made investments across AI model developers, data centre infrastructure, semiconductors and robotics.

It has taken on debt at eye-popping yields and at the end of June, SoftBank had net interest-bearing debt of 10.8 trillion yen (US$68 billion) compared to 6.6 trillion yen a year earlier.

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The worries about the AI sector pulled SoftBank’s shares 11 per cent lower on Friday while the cost of insuring its debt against default hit a four-year high. Its shares fell 4.2 per cent on Monday and are down 23 per cent for the year to date.

Debt-financing questions

SoftBank’s earnings results are highly volatile and difficult to predict. Forecasts from three analysts polled by LSEG for July-September net profit range from a gain of 233 billion yen to a loss of 113 billion yen.

Earnings numbers are due out at 0630 GMT and a briefing by chief financial officer Yoshimitsu Goto will commence at 0730 GMT.

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Investors are also looking for guidance on prospects for further debt-based financing as the value of some of SoftBank’s largest holdings such as chip designer Arm, which provided collateral to take out loans, has fallen.

Arm’s shares meaningfully below US$200 increases pressure on SoftBank’s finances, Jefferies analyst Atul Goyal wrote in a note in October. They stood at US$175 on Friday, having fallen around 60 per cent since a record high in June.

SoftBank could adopt a more defensive posture, said Futurum’s Bulk.

“SoftBank may find itself in a position where they have to stop investing, de-lever and even sell down some of their positions,” he said. “Of course this is something they have done in the past.”

Investors will also be looking for potential comments by SoftBank on how it plans to respond to China’s blocking of its US$5.4 billion takeover of ABB’s robotics division.

ABB and SoftBank were optimistic they could find a solution and SoftBank is also in talks with Chinese authorities, according to a person familiar with the matter.

The companies are weighing whether to carve out the China business, Bloomberg News has reported. REUTERS