What Uber's IPO tells us about SoftBank's big ride-hailing bet

[TOKYO] As Uber Technologies prepares for its mammoth initial public offering (IPO) later this week, no one has more on the line in the ride-hailing business than Masayoshi Son, chief executive of SoftBank Group. The Japanese entrepreneur has bet US$18 billion on the sector by taking stakes in the US pioneer and three similar startups.

So what are his potential returns? Many of Mr Son's own investors at SoftBank are skeptical. But one analyst crunched the numbers to find plenty of promise: He figures Mr Son has already made close to US$9 billion on paper, with a lot more upside if his portfolio companies can realise their vision for robot taxis and artificial intelligence.

SoftBank's stakes in Uber, China's Didi Chuxing, Southeast Asia's Grab and India's Ola are worth between US$22.1 billion and US$26.5 billion, according to Chris Lane, an analyst at Sanford C. Bernstein. The calculation is part of a 27-page report issued Wednesday and is based on the price-to-sales valuations of Uber and rival Lyft.

Mr Son sees the combination of hitching rides via an app and robot taxis as a transportation revolution comparable to that which replaced horse-drawn carriages with cars a century ago. He has said SoftBank and its Vision Fund control 90 per cent of the ride-hailing market worldwide through their investment portfolio, including a US$2.25 billion stake in General Motor's self-driving unit Cruise. Uber is also said to be in talks to sell a US$1 billion stake in its autonomous driving division to a consortium of investors led by SoftBank.

"People are starting to feel more comfortable with the investments Son has made in this space," Mr Lane said in an interview. "They are attacking the problem from many angles."

A shift from the current driver-for-hire model to fully-autonomous vehicles could quadruple the industry's revenues, while cutting costs in half and pushing up the value of the ride-hailing portfolio to between US$240 billion and US$430 billion by 2030, Mr Lane projects. That implies an annualized return between 24 per cent and 30 per cent over the next 12 years. The estimates don't include SoftBank's stake in Cruise and the reported investment in Uber's own autonomous unit.

To get there, ride-hailing companies would have to reduce their operating expense ratios to about 30 per cent of revenue, from 88 per cent for Lyft and 77 per cent for Uber now. Robot taxis would also have to cost about US$50,000 apiece and be used more than 60 per cent of the time, or about 40 trips a day, Mr Lane wrote.

"For these companies to achieve their long-term potential, they need to be autonomous," he said. "Ultimately, that's what they are designed to do."

At an earnings briefing in February, Mr Son indicated that ride-hailing is a long-haul bet. He showed a black-and-white photo of New York's Fifth Avenue in 1900, thronged with horse-drawn carriages. Another photo of the same street 13 years later was full of Henry Ford's Model Ts.

"I'm investing into the industry, I'm not investing into one horse," Mr Son said in March, speaking at the Milken Institute conference in Tokyo. "If that industry takes off - we win. That's the simple strategy."

But SoftBank investors may not have to wait a decade to reap the rewards. SoftBank may book a valuation gain from its 16.3 per cent stake in Uber when the Japanese company reports earnings results on Thursday. Uber is set to price its IPO at the top end of the targeted range, which would value the company at almost US$84 billion. Mr Son's stake would be worth almost double the US$7.7 billion he paid little more than a year ago.

SoftBank shares have gained more than 50 per cent this year and reached their highest level in 19 years, buoyed by a 600 billion yen (S$7.4 billion) share buyback announced in February. Investors can also look forward to a windfall from the planned listing of Slack Technologies, another portfolio company, later this year.

The shares still trade a steep per-cent discount to what Mr Son considers to be a fair valuation of the company. SoftBank's own sum-of-parts calculation, which includes stakes in China's Alibaba Group Holding, Sprint and chipmaker Arm Holdings, puts its total value at about 21,000 yen a share. The stock closed at 11,470 yen on Wednesday.

"As (Mr Son) gets more proof points like that, people will begin to come around to the fact that he might be a bit eccentric, but he kind of knows what he's doing," Mr Lane said. "If the world suddenly believes with the confidence that he believes, then SoftBank is worth a lot more than it's trading at."

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