SoftBank to log slim profit ahead of Masayoshi son’s next AI bet

SoftBank Group Corp. is likely to report a small profit, an indication of how past mistakes continue to weigh on the company even as billionaire founder Masayoshi Son prepares his next big AI bet.

Emerging from a month of sharp selloffs, the Tokyo-based investment firm on Wednesday is expected to report a net income of ¥1 billion ($6.9 million) for the June quarter, according to the average of three analysts polled. That compares with a big loss of ¥477.6 billion a year ago, but is tiny compared with profits in the preceding two quarters, attesting to the continued drag from hundreds of loss-making startups that remain on Vision Fund books.

SoftBank is preparing to report earnings at a critical juncture. Its stock plunged Monday by its most since 1998, as investors fled global tech stocks partly on concerns over the time it will take for much-hyped AI to yield profits. The shares recouped most of that loss Tuesday morning, but SoftBank’s market value was still down roughly $50 billion from a record high notched in July.

A sustained rout would hurt the Japanese company’s ability to secure financing, even as it increases the attraction of potential deals. The market turmoil’s also hurt Son’s personal wealth, erasing a big chunk of his gains this year. Shares rebounded as much as 14% Tuesday morning in Tokyo.

The earnings come as Son gears up for his next big gamble on the future of artificial intelligence. The billionaire has a large cash pile to deploy, after years of reining in investments. His ability to raise financing has soared thanks to Arm Holdings Plc’s initial public offering last year, while earnings got a further boost from another sale of T-Mobile US Inc. shares to Deutsche Telekom AG as part of a 2020 deal.

Shares of Arm — the company that Son says will be at the heart of his next project — are down about 40% from their peak in July, after it gave an unchanged outlook, citing weaknesses in markets other than data centers and high-end smartphones. Arm is trying to break into broader fields such as automotive applications.

Son, who turns 67 on Sunday, has said that he is ready to swing for the fences. The company is working on a plan to deploy some $100 billion into AI-related chips, Bloomberg earlier reported.

SoftBank bought British semiconductor startup Graphcore Ltd. for an undisclosed sum last month. The Bristol-based startup designs semiconductors to run AI programs, but has struggled to gain traction, even as larger rival Nvidia Corp. surged ahead.

“We see progress with entry into the AI chip business as a potential catalyst for SoftBank Group’s share price,” Daisaku Masuno, an analyst at Nomura Securities Co. wrote in a note last week. “It would be positive if SoftBank Group were able to realize a wide range of partnerships with the hyperscalers.”

Here is what analysts are saying:

Bloomberg Intelligence (Marvin Lo, Chris Muckensturm)

• SoftBank’s AI investment strategy “might not be smooth sailing with execution risk high”
• “AI’s hype is fading now that there’s a greater focus on AI companies’ ability to deliver revenue and earnings. The reality check could cap SoftBank’s Vision Funds investment income despite a potential cut in the Fed’s rate in the near term”
• The company’s recent asset monetization boosted liquidity, letting it support an aggressive investment strategy

Astris Advisory (Kirk Boodry)

• “Concerns on tech growth have brought Arm back to where it traded in May. We think Arm shares got a bit ahead of themselves in July.” The lack of a guidance hike “added fuel to the fire”
• SoftBank shares slumped 25% over past two days pushing the discount to NAV to an estimated 57% as of Monday
• “It may be too early to call a bottom, but we do think it is worth highlighting that the discount is approaching record levels at 57% versus the 70% it reached when markets sold off on Covid fears”
• Softbank shares may continue the slide that started mid-July. But Arm’s low free float tends to exaggerate share price reactions, meaning some recovery is also possible

Macquarie (Paul Golding, Emma Liang)

• The Graphcore acquisition indicating SoftBank’s interest in a vertically-integrated supply chain — from processor design to chip manufacturing — is “quite bold” but anchored by SoftBank’s 90% stake in Arm
• “The acquisition could meaningfully advance SBG’s larger AI ecosystem aspirations, especially in light of the short supply of compute amidst surging demand for accelerators”
• Given Arm’s pivotal role in SoftBank’s AI strategy, collaboration among the two companies could unlock more potential from the AI ecosystem portfolio, thereby boosting SoftBank’s NAV

Citigroup (Mitsunobu Tsuruo)

• Graphcore specializes in developing AI chips and SoftBank could make “significant further investment” to increase scale and promote collaboration with Arm
• “SoftBank has just begun investing in AI semiconductors, and we anticipate progress in development tools and investment in forming a developer community”