After 133% rally, SoftBank investors bet there's more to come

[TOKYO] SoftBank founder Masayoshi Son has delivered a clear response to critics who thought the twin disasters of WeWork and the coronavirus would bring down his empire: not just yet.

The Japanese technology giant's shares have more than doubled from their March low, propelled by buybacks and improving market conditions for its portfolio companies. They gained another 3.6 per cent on Monday after the story was published. SoftBank bonds, which traded at less than 65 US cents on the dollar in March, have recovered to near par. Mr Son, 62, has seen his own net worth soar to US$20 billion, the highest since the Bloomberg Billionaires Index began tracking his wealth.

Plenty of investors remain sceptical of SoftBank and Mr Son himself. Still, multiple factors suggest more room for short-term gains: Earnings are set to recover from last quarter's record loss, shorts are under pressure to cover losing bets by buying shares and SoftBank's share buybacks of as much as 2.5 trillion yen (S$32.51 billion) are just getting started.

"The share price can still double," said Richard Kaye, Japan equity analyst and portfolio manager at Comgest Asset Management, which holds a US$60 million stake in SoftBank. There has been too much focus on WeWork, he says, and not enough on the "eight or nine things that have gone very right."

Mr Son has made a career out of confounding his doubters. After backing hundreds of startups during the dotcom boom, Mr Son lost a record US$70 billion as almost all those companies failed, leaving SoftBank's future in doubt. Yet he slashed costs and survived. In 2006, he acquired the Japan unit of Vodafone Group in a widely panned US$15 billion deal that few thought would pay off. Mr Son turned the business around, in part by persuading Apple's Steve Jobs to give him exclusive rights to the iPhone in Japan.

Yet the past year proved the Japanese entrepreneur's most challenging in decades. After refocusing SoftBank on technology investments with the US$100 billion Vision Fund, several startups he had backed ran into trouble, culminating with WeWork's disastrous flop. The coronavirus pummelled SoftBank's investments in the so-called sharing economy, businesses built on people splitting the use of cars, rooms and offices. Credit default swaps, the cost of insuring against default, spiked to the highest level in a decade.

A NEWSLETTER FOR YOU

Monday, 3.30 pm

Garage

The hottest news on all things startup and tech to kickstart your week.

Sign Up

Mr Son had a lifeline this time around, however, that he lacked during the dotcom bust: his stake in Chinese e-commerce giant Alibaba Group Holding worth more than US$150 billion that could be sold for cash at any time. In March, just days after a record plunge in its shares, SoftBank said it would sell 4.5 trillion yen in assets. That has helped fund a record pace of stock buybacks this year - and they're far from over.

SoftBank has announced three buybacks this year, completing only one of them, a 500 billion yen program announced March 13. While that was wrapped up June 15, the company has already announced two separate programs totalling one trillion yen - a further one trillion yen has been promised, but not yet committed.

SoftBank's pattern of buying its shares is also significant. In line with Tokyo Stock Exchange guidelines, buybacks stopped for five days before the fiscal year-end in March. In April, having bought every day that month, buybacks suddenly paused for an entire month, during which SoftBank announced earnings. Ahead of that halt, however, the amount bought each day surged to triple the usual amount for five consecutive days. Many of these days saw outsize moves in SoftBank stock - rising by 5.2 per cent one day, and 6.9 per cent on another. With earnings just over a month away, the current pace may increase in a similar pattern.

SoftBank said it would follow stock exchange guidelines for repurchases, without providing any more detail.

At the same time, margin sales on the Tokyo Stock Exchange are at the highest level since December 2012, according to data from the bourse. Sales on margin, a type of short-selling, represent bets against the company - which many investors had also tried in 2012 following the announcement of its Sprint acquisition.

But those who bet against it eight years ago lost out - in the first six months of 2013, as margin sales dropped, the stock more than doubled. History might repeat itself. If the upward pressure from the buybacks is sustained, that could force shorts to cover their positions, sending the stock even higher.

"The shorts got this one wrong," said Ikuo Mitsui, a fund manager at Aizawa Securities. "Going forward there's likely to be more short-covering which will make it harder for the share price to drop."

In recent months, Mr Son has argued the key metric for SoftBank investors shouldn't be profit or revenue but shareholder value, specifically the equity value of the company's holdings minus its net debt. "You should look at shareholder value, how much gain or a loss the company recorded, because we are an investment company," he said earlier this year.

In fact, SoftBank has taken to providing its own daily calculation of what its shares should be worth, based on its equity holdings of Alibaba, T-Mobile US and the domestic wireless operator SoftBank Corp. As at Friday, shareholder value stood at 13,230 yen, according to SoftBank, more than twice its share price even after the run-up of more than 130 per cent from its March low.

SoftBank has benefited from a rebound in its portfolio of companies, particularly Alibaba. The e-commerce giant hit record after record this year, with its market valuation pushing past US$700 billion. Uber Technologies, a key Vision Fund investment, has more than doubled since its mid-March trough.

The macroeconomic environment is also improved in recent months. Jefferies analysts including Atul Goyal wrote in a May report that the Federal Reserve support of the US market is a boon for SoftBank. With the Fed backstop for investment grade and high-yield bond market, they write, "a lot of that excess money supply and liquidity is likely to flow to higher-yielding investments".

There are signs that SoftBank's portfolio of startups will face an improved reception as they look to go public. Online home-insurance provider Lemonade, one of Mr Son's investments, more than doubled after its initial public offering this month.

The company's debt has also recovered. SoftBank's 6.875 per cent perpetual dollar bonds plunged in March to as low as 64 US cents on the dollar and have since recovered to around par on Thursday, according to data compiled by Bloomberg.

"SoftBank executing on its asset sale target is a positive for the credit," CreditSights analyst Mary Pollock said.

On Thursday, SMBC Nikko analyst Satoru Kikuchi raised his price target for SoftBank, using a sum-of-the-parts model that lifted his valuation 11 per cent to 7,000 yen.

Risks - and sceptics - remain. A surge in virus cases in the US could still break the Fed's magic spell over the markets, while the US-China trade war could disrupt business and upend companies like Alibaba. Investors also fret that Mr Son will be tempted to bail out troubled portfolio companies, like he did with WeWork.

Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management in Tokyo says he personally wouldn't suggest going overweight on SoftBank given how fast the stock has risen over the past couple of months.

But for Mr Son's fans, the inscrutable billionaire has pulled off yet another escape from the abyss.

"As the market starts to realise the strength of SoftBank's position," said Comgest's Mr Kaye, "there will be a proper reassessment of SoftBank's share price".

BLOOMBERG