TheChek News Flow

The Takeaway

• Analysts raise concerns about SoftBank’s spending

• SoftBank could influence portfolio companies to buy Intel-made chips

• SoftBank’s dealmaking likely won’t stop

In May, a Nomura Securities equity analyst asked SoftBank Chief Financial Officer Yoshimitsu Goto a pointed question on an earnings call: How could he justify SoftBank’s recent $6.5 billion purchase, using borrowed money, of Ampere Computing, a failing developer of data center chips? The startup had just $16 million in revenue and had lost hundreds of millions of dollars the year before the sale.

Goto didn’t answer the question directly. “I believe the valuation falls within a reasonable range,” he said, according to a transcript of the call, adding that SoftBank followed procedures carefully for a deal its board approved. The acquisition is still awaiting U.S. government approval. The exchange reflected simmering worries among investors about SoftBank’s spending even as the company’s investment in OpenAI is lifting its stock price.

SoftBank executives have made it clear that the whirl of dealmaking isn’t likely to stop. In February, executives at the Japanese conglomerate showed investment bankers a slide showing roughly two dozen AI and infrastructure-related deals it either had done or was considering, according to a banker who attended the call.

The latest, and one of its highest profile, is its $2 billion investment last week in Intel, the struggling chip manufacturer now partly owned by the U.S. government. The investment potentially provides SoftBank with a missing piece of its portfolio: chip manufacturing. SoftBank was most interested in the deal because of Intel’s foundry business, which is looking to compete with chipmaking giant Taiwan Semiconductor Manufacturing Co. in making chips for other companies, a person close to SoftBank said. In the past, Intel has concentrated on making its own chips, but TSMC’s rise to chip dominance has highlighted the weaknesses of that approach.

The Intel investment came the same week SoftBank bought an electric vehicle factory in Ohio from Foxconn to make AI computer servers. SoftBank will be installing those servers in future data centers as part of its planned—and delayed—$500 billion Stargate project. And in addition to purchasing Ampere, SoftBank also bought a smaller, struggling British AI chip firm, Graphcore, last year.

SoftBank CEO Masayoshi Son appears to have sufficient investor support to keep the money flowing. The company’s stock has hit record highs this year, up 79% year to date, driven in part by an increase in value for its huge bet on OpenAI, as well as the stock price of Arm Holdings, which has increased more than 160% since SoftBank took it public in the fall of 2023, although it’s only up 9% this year. Arm sells chipmaking architecture to companies like Apple and incorporates its technology into Nvidia chips.

Time and time again, SoftBank’s high-wire investment strategy has hinged on the idea that its constellation of investments could complement each other. Sometimes the strategy flops. It bet on ride-hailing companies like Uber and Grab with the idea that it could create a global transportation network—an idea that never came to pass. It wanted to stock office buildings operated by WeWork with other startups it was backing, a strategy it couldn’t pull off.

“Softbank’s approach to investing has always been an index-like approach—own every layer in the stack that feeds into a megatrend, then have all those players give business to each other to strengthen each other,” said Kevin Xu, founder of Interconnected Capital, an investment fund focused on AI infrastructure stocks.

Xu, whose investment firm owns Intel shares, said the chip deals seemed to tie together in a few ways. SoftBank’s investment in Intel, for instance, could indicate SoftBank’s willingness to influence its companies to commit to using Intel’s chipmaking foundry, a crucial sign of support for the struggling business. Intel CEO Lip-Bu Tan said in a note to employees last month that Intel’s investment in its next-generation chipmaking process, 14A, will hinge on confirmed customer commitments. It is expected to mass-produce chips by 2027 if it can secure enough customers and ensure efficient production.

Access to that chip production would also be useful if SoftBank pulls off a long-shot effort to develop its own chip. Its purchases of smaller firms like Ampere and Graphcore would give Son a bigger stable of chip designers, who “are as scarce as the AI researchers getting the big packages from OpenAI and Meta,” Xu said.

Valid Concerns

Still, some Wall Street analysts have started to raise questions about whether the heavy spending is too risky. David Gibson, an equity analyst at MST Financial, wrote in the spring, “Son’s plans for chipmaking I think remains a big risk in the short term.” He added that the purchase of Ampere “raises valid concerns that Masa is spending excessively like he did with WeWork.”

But SoftBank may have bigger ambitions. Arm reported last month that a growing portion of its revenues are from selling licenses and providing design services for SoftBank, which still owns about 87% of Arm.

That indicated SoftBank itself was building an AI chip using Arm’s technology, even if it has not announced a product. (If the effort is successful, it would provide some cold comfort for SoftBank on missing out on the meteoric stock rise of dominant chip provider Nvidia, which agreed to buy SoftBank-owned Arm in 2020 before the deal collapsed due to regulatory scrutiny.)

“Our business relationship with SoftBank has expanded to help them build towards their greater, broader AI vision,” said Arm CEO Rene Haas on the chip designer’s earnings call last month. Haas has become a close confidant of Son and sits on the board of Stargate.

The fates of SoftBank and Arm are deeply intertwined in other ways. As of last quarter, the value of SoftBank’s stake in Arm made up 48% of SoftBank’s roughly $200 billion asset value, a crucial metric that allows it to borrow more money. Earlier this year, SoftBank took out $8.5 billion of loans, adding to the tens of billions of dollars of debt it already had. Its executives have said they will maintain debt levels around or below 25% of the value of its assets.

The company has also been selling stakes in telcos Deutsche Telekom and T-Mobile to finance its AI investments, and anticipates it will get more cash from initial public offerings of startups it owns, like Japanese payments firm PayPay.

And despite anxieties among investors about SoftBank’s spending, Son continues to find enough banks to finance his AI ambitions. For Japanese and European banks that have worked closely with Son for many years, SoftBank is an extremely important customer, because few other clients in their countries repeatedly borrow large amounts as SoftBank does.

Gibson, the MST Financial analyst, estimated the company would have about a $20 billion shortfall over the next few years, which it could cover in part by selling more of its stakes in Deutsche Telekom and T-Mobile.

Plenty of questions remain about Son’s ability to make all his deals come together. But Xu noted, “None of this has to make sense at the end of the day either, because we are dealing with Masa’s whims and desires to build empires, so everyday business logic may not matter.”