Is a 1.3-quadrillion yen deficit the beginning of the end? SoftBank's "three bombs"
Hello, this is Shimo-yama.
“SoftBank Group, Operating loss 1.3646 trillion yen”
Last week, shocking numbers were announced.
At the earnings briefing there was hardly any smile from the President Son
and the atmosphere was very gloomy.
(SoftBank Group
FY2020 March Earnings Briefing Video
https://group.softbank/news/webcast/20200518_01）
Just three months ago, he spoke boldly, saying
“the tide has changed!”
I remember that President Son sounded different
as if he were a different person.SoftBank’s market capitalization
had previously plummeted to a quarter during IT bubble bursts,
dropping to as low as 1/100 in the past.
When President Son looked back on that time,
he said,“Rather than fear, I wanted to try harder.”
I recall him saying something like that, but
this time the atmosphere did not feel that way much,
and it gave the impression that he was under a lot of stress.
“This shock willaccelerate a paradigm shift toward a new era,”
he said, but his tone was low,
and the presentation time was shorter than usual,
leaving no choice but to feel the severity of the situation.
So, in reality, how bad is SoftBank G?
This time, while reviewing the announced earnings figures,
I will consider three bombs that are especially high risk.
SoftBank G’s stock price has a significant impact on the Nikkei average as well,
and operating losses of 1.3646 trillion yen are a figure rarely seen in history.
Moreover, these losses are not from business failures,
but from investment losses,
providing many lessons for traders.
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WeWork problem
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Regarding the operating loss of 1.3646 trillion yen (consolidated for the year ending March 2020)
what happened to cause such a huge loss?
Most of this loss came from SoftBank Vision Fund’s
investments.
Currently, SoftBank Vision Fund has invested in 88 startups worldwide,
among which the most notable is the WeWork issue.
This is arguably Son’s biggest failure.
So, specifically,
how much money was invested and
how much loss was incurred?
In the recently released “Earnings Report” it states the following.
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As of the end of March 2020,
the cumulative investment in WeWork amounted to 10.3 billion USD,
and its carrying amount was 2.4 billion USD.
(SoftBank Group
‘Consolidated IFRS Financial Statements for the Year Ended March 2020’
https://group.softbank/system/files/pdf/ir/financials/financial_reports/financial-report_q4fy2019_01_ja.pdf
P.9)
＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊
Originally, WeWork’s value was estimated at about 47 billion dollars.
but,
by the end of September last year its value had fallen to about 7.8 billion dollars.
Since then, at each review, the valuation has fallen,
and as of March 2020 end,
due to the impact of the coronavirus,
it had fallen to about 2.9 billion USD.
470 billion dollars down to 29 billion dollars…
what a crash.
Going forward, the carrying amount could be further reduced.
Whether WeWork can survive in the first place is also questionable.
There is also the risk of lawsuits and other liabilities.
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UBER disaster
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Another miscalculation is Uber.
Recently, nearby, you can see Uber Eats couriers
cycling around on bikes.
Due to COVID-19, demand for food delivery has
grown worldwide,
so some may think,
“Uber must be making a lot of money.” but the reality is not so sweet.
First of all, Uber’s core service is not
the food delivery, and
it faces fierce competition.
In fact, Uber Technologies
sold its Indian food delivery business in January this year.
Uber’s strength is its ride-hailing service.
In Japan this is less familiar,
but from what people say abroad,
Uber is still quite useful.
Getting into a taxi and
worrying about being ripped off,
in countries where you cannot use it with confidence,
it is especially valuable.
A friend who used Uber in India told me
that the cars are always lightweight SUZUKI cars,
the driving is rough, and the ride not comfortable…
Also, they once specified the wrong destination in the app,
and in a strange place
dropped off without notice,
and walked around for about an hour with a suitcase,
he told me.
However, even so, considering the anxiety of riding a normal taxi in unfamiliar places,
Uber remains a valuable service.
However, ride-hailing services are greatly affected by COVID-19,
and on the 18th of last month Uber Technologies announced
a 3,000-person staff reduction.
SoftBank Vision Fund has
as of end of March this year invested in Uber
about $9.5 billion in total,
and has incurred losses of about $1.4 billion,
but if a second wave of COVID-19 hits,
the loss amount is highly likely to rise.
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The danger of relying on Alibaba
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Finally, Alibaba.
As I mentioned in a previous newsletter,
the premise is that SoftBank Group
is heavily reliant on Alibaba.
In the end, whether Alibaba’s stock price goes up or down
determines SoftBank Group’s fate.
This is no exaggeration.
Alibaba’s stock price dropped sharply in March,
but recently has somewhat recovered.
The second wave of the coronavirus could cause the stock price to fall again,
but Alibaba is often called the Chinese Amazon,
so even if the second wave of the novel coronavirus leads to city lockdowns again,
demand could actually increase.
Therefore, regarding Alibaba’s business continuity,
there may not be too much concern.
However, of course there are risks.
Deteriorating US-Chinese relations is one of them.
Last year,
there were reports that the Trump administration would consider
delisting Chinese stocks from U.S. exchanges,
and if US-China relations worsen,
anything could happen.
Even without that, a new global stock market crash could occur,
and Alibaba’s stock could plunge.
Considering that the Fed is conducting unlimited monetary easing,
it is natural to think that a distortion will eventually explode somewhere.
If Alibaba’s stock were to crash drastically,
how would SoftBank G respond? I don’t know,
but if not planned,
SoftBank G faces a high likelihood of further hardships.
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Always expect the worst
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WeWork problem, Uber and Alibaba stock declines,
etc., SoftBank is currently in a risk-packed state.
The word
“caution” was used by Son, but
the current risk hedges seem insufficient.
SoftBank Group may not be in imminent bankruptcy, but
when the worst-case happens,
it is worrisome that we cannot see how to respond.
“As investors, we must always think of the worst.”
This is a conclusion I repeatedly draw from SoftBank G’s series of investments.
Thank you for watching until the end today as well.
Keizo Shimoyama
