SoftBank Answered Critics With a Strong Turnaround. Its CEO Explains What Comes Next.
SoftBank Group CEO Masayoshi Son has spent the past 18 months fundamentally revamping the company he created almost 40 years ago.
The result is a more rigorous approach to investing, a clearer mission, and an increased conviction that SoftBank (ticker: SFTBY) can generate substantial returns by investing in artificial-intelligence plays. Faced with widespread doubts about the company’s strategy, Masa has answered his critics with stellar performance.
The CEO, known universally as Masa, recently sat down with Barron’s—remotely—for a rare hourlong interview to talk about the many recent changes at SoftBank. In a wide-ranging discussion, he confessed to some regrets, explained why he thinks SoftBank is still undervalued, and why he is enthused about the prospects for investing in artificial-intelligence-based start-ups.
The spur for these changes began on one of SoftBank’s darkest days—the withdrawal of the planned WeWork initial public offering in September 2019. At the time, SoftBank had invested $11 billion in the short-term real estate rental business.
The situation was a black eye for Masa, who was widely criticized for not paying enough attention to WeWork’s business model and corporate-governance practices. Almost overnight, it became the conventional wisdom that Masa’s reputation as one of the world’s great investors was overblown—and that the nearly $100 billion SoftBank Vision Fund, the world’s largest venture fund, was simply too big to manage.
A few months later, the pandemic took hold and the situation got worse. SoftBank’s shares lost half of their value in weeks as risk-averse investors fled. In February 2020, the activist hedge fund Elliott Management began pressing Masa to sell assets to raise cash to buy back stock to close the 50%-plus gap between the stock’s market capitalization and its underlying net asset value.
SoftBank took the request seriously. In April 2020, the company announced plans to sell $41 billion in assets. Over the past year, SoftBank sold $51 billion of assets, largely by trimming stakes in T-Mobile US (TMUS), Alibaba Group Holding (BABA), and SoftBank Corp. (9434.Japan), the similarly named Japanese telecom company. SoftBank bought back $17.9 billion of stock and paid down $9.2 billion in debt.
The program worked. SoftBank shares have more than tripled from their lows. Its American depositary receipts are up more than 87% in the past year, trading at a recent $39.65.
What has worked more than anything else has been the two Vision Funds. Vision Fund 2 is now the main investing vehicle. Announced in June 2019, it was intended to be even larger than the first fund, at $108 billion. But as the WeWork story unfolded and other investments failed, Masa couldn’t persuade outside investors to participate. The company started the fund anyway, using its own capital. Now, SoftBank is increasing the size of the fund to $30 billion from $10 billion. Fund 2 has invested in 94 companies, several more than Fund 1.
The key to understanding SoftBank’s transformation is this: The funds are fulfilling Masa’s vision.
Fund 1 has generated $57.1 billion in cumulative investment gains since inception, on $85.7 billion in invested capital. Fund 2 already has $5 billion of gains, for an annualized return of better than 100%. And WeWork—WeWork!—is nearing a listing via a special-purpose acquisition company merger.
Below are edited excerpts from the conversation with Masa. The discussion was conducted over Zoom, live from SoftBank’s headquarters in Tokyo
Barron’s: Masa, why the focus on investing in artificial intelligence?
The internet has disrupted advertising and retailing, basically those two. Artificial intelligence is disrupting every other industry. Advertising is only 1% of gross domestic product. Retail is 10%.
The other 90% is untapped by the internet revolution, yet the internet already accounts for seven or eight of the top 10 market-cap companies in the word. AI is going to disrupt education and fintech, transportation, and medicine. I’m taking risks for that.
In reporting earnings a few weeks ago, you mentioned having regrets, despite the Vision Fund’s recent successes.
We have lots of regrets, making bad investments or missing great companies. WeWork is going to become profitable in the next several quarters. So, I hope that we’ll be able to regain some of the investment we made there. But there are companies that went bankrupt, like Greensill and Katerra. You also have to look at the companies we missed.
Tell us about a few you missed.
There was Airbnb [ABNB]. And Snowflake [SNOW]. There were a bunch that went public in the past two or three years, where we should have invested. We thought prices were too high. But post-IPO, they’ve proved to be not as expensive as I thought.
You seem to have adjusted your investment style with Fund 2.
Not really. Three or four years ago, there was the first wave of the ride- sharing businesses, and we wanted to invest in all of the leaders [including Uber Technologies (UBER), Grab, Didi, and the food-delivery service DoorDash (DASH)]. We took big bets, $8 billion to $10 billion each. That was like half of our portfolio. But other than those, the investments in Fund 1 were similar to Fund 2, with each investment roughly a few hundred million dollars, in most cases a 10% to 40% stake. And that’s unchanged.
You recently tripled the size of Vision Fund 2 to $30 billion.
We see lots of great investment opportunities. As you know, in the beginning of Fund 2 we chased additional investors to come in, and we were unpopular. Nobody wanted to take risks with us. So we had no choice but to use our own money. Now, we have enough cash within our company, so I’m not chasing any outside investors right now.
You completed your stock buyback program. Will you extend it?
We always have that option. We watch our share price. And we watch additional investment opportunities.
Despite the buyback, SoftBank trades at a 40% discount. Does that bother you?
The discount is too much. Investors still don’t trust our ability to continuously make good upside. We have to prove ourselves in the next few years. People talk about us as if we are an index fund. If you are an index, you don’t trade at discount. Someday, I believe we will trade at a premium.
You’ve agreed to sell United Kingdom chip designer Arm Holdings to Nvidia [NVDA] for $40 billion. Are you worried that regulators will kill the deal?
I’m optimistic. This is not horizontal aggregation. The two companies are in completely different businesses. We are not creating any unfair advantage. Nvidia will continue to license the Arm architecture to other players. It is just a matter of time, I believe. I’m not considering plan B. I’m not worried.
SoftBank has created nine SPACs: three from SoftBank Investment Advisers, one from your Latin American unit, and five from the Fortress Investment unit. What do you like about SPACs?
Almost 40% of U.S. IPOs were through SPACs over the past 12 months. With regulators tightening the rules for SPACs, it will reduce the percentage of IPOs. But it still is one of the options that companies have. We will probably make a few SPACs a year. But that is not our main strategy.
What’s your view on cryptocurrency?
I still don’t have a view as to whether it’s a bubble and hype or something real. I’m not criticizing people with an interest in it. We have many financial-services companies within the funds, and I’m open to having any discussion, to learn about it, to consider it. But we don’t have any major presence there yet.
You’ve had a nice run of exits from the funds. What might be next?
Didi is a great company with big market share, growing, and already profitable in China. I don’t want to say specific timing [for an IPO], but they’re actually ready, anytime. Also, ByteDance [parent of TikTok] is a gigantic success. Which market, and what timing [for an IPO], depends on many [variables] that will be decided by [CEO Zhang] Yiming, but it is a great company, very profitable, growing very well, with great technology, and a great customer base. They’re ready.
Do you have any plans to trim your Alibaba stake any further?The stock has struggled this year, but it remains more than 40% of your net asset value.
I’m not interested in selling. It’s a great company, at a low price compared with its fundamentals, so now is not the time to sell.
Tell me about your Latin America fund.
[Chief Operating Officer Marcelo Claure] came to me and said, “Masa, let me expand into the Latin market, GDP-wise, it is half the size of China. And it’s one or two cycles behind China.” And I said, OK, let’s give it a try, and he has executed beautifully. They have generated an internal rate of return of over 60%. So we are expanding the fund.
You’ve changed your approach to managing your investment team.
We now have expert teams in each of the domains and geographies. So, there’s a team focused only on fintech in the U.S., and there’s a team that looks only at education technology in China. We have 26 teams. Every day, the group leaders bring me meetings with entrepreneurs. I meet every entrepreneur we fund, face-to-face, like this on Zoom. I look at the business model, I look at the financial forecasts, I ask many questions. Sometimes I say no—sometimes it is too expensive, and sometimes it’s not using AI. But we’re now like a machine, and the 26 teams compete.
You seem to really like meeting on Zoom, Masa.
Actually, Zoom made us very productive. Only 12 months ago, did you do this kind of Zoom meeting every day? I feel like we are meeting face to face, and it is so convenient. But once in a while, I miss hugging people. I’d like to travel to the U.S., and China, and to Europe. But the number of trips will be less than before.
Over the past year, you used some cash to take big positions in tech stocks, and you took some heat for that.
We still have some, but we’re cutting back; we see more opportunities with the Vision Fund. We had excess cash; it’s better to invest it than to keep it in the bank. But we now have enough uses of the cash; we have the ecosystem to invest more.
Thanks, Masa.