SoftBank's Profitability Surges Amid AI Investment Boom

SoftBank Group Corp. marked its second consecutive quarter of profitability, fueled by a surge in artificial intelligence investments that bolstered assets like Arm Holdings Plc.

Based in Tokyo, the company posted a net income of ¥231.1 billion ($1.5 billion) for the March quarter. SoftBank surpassed expectations and made a significant improvement from the ¥57.6 billion net loss previously. This turnaround was attributed to investment gains at the holding company and on derivative contracts. SoftBank reported a narrower net loss of ¥227.7 billion for the full year, surpassing predictions.

Despite these gains, the Vision Fund reported a surprise loss of ¥96.7 billion. The firm marked down a series of valuations in the second Vision Fund’s portfolio of hundreds of unlisted startups. That accounted for about ¥54 billion in realized and unrealized losses on the likes of JD Logistics Inc., Better Holdco Inc., DingDong Ltd., and AutoStore Holdings Ltd.

Analysts, like Satoru Kikuchi from SMBC Nikko Securities, highlighted the positives of the Arm IPO and share price rally. He said,

The Arm IPO and share price rally were notable positives,” said Satoru Kikuchi, a senior analyst at SMBC Nikko Securities, in a note ahead of the earnings. “Our focus is on strategic investments directed by SoftBank Group rather than diversified investments like Vision Fund 2.

SMBC Nikko Securities’ Division Research Senior Analyst, Satoru Kikuchi

SoftBank Asset Divestments Strategy

Under Son’s leadership, SoftBank aims to refocus its investments in artificial intelligence and semiconductors, mainly to expand Arm’s reach beyond mobile devices. By March’s end, the company had been gradually divesting from its publicly listed holdings, boosting its cash reserves to ¥6.2 trillion.

In recent months, SoftBank has stepped up investments in AI-related hardware, taking controlling stakes in some cases. The Japanese investment firm is negotiating to acquire British semiconductor startup Graphcore Ltd.

Earlier this month, SoftBank led a $1.05 billion funding round for UK self-driving startup Wayve Technologies Ltd., investing along with Nvidia and existing backer Microsoft Corp. In 2022, a SoftBank blank-check firm merged with robotics warehouse automation firm Symbotic Inc., and the two firms have since partnered on projects.

Debt Levels and Rising Interest Rates

The heavily indebted company is also fighting the prospect of rising interest rates. On the group level, SoftBank booked ¥982.2 billion foreign currency-denominated borrowings in the March quarter.

SMBC’s Kikuchi said the market could well receive SoftBank’s attempts to leverage Arm technology and invest in AI services. SoftBank could offload its holdings in T-Mobile, Deutsche Telekom, or Arm to increase investment funds. In the past, SoftBank has sold off stakes in assets such as Alibaba Group Holding Ltd. to finance new forays, shore up its balance sheet, and buy back shares.

“What I want to know is their stance on investing, in addition to how strong the earnings recovery turns out to be,” said Tomoaki Kawasaki, a senior analyst at Iwaicosmo Securities. “After holding back on investments for a while, they’ve hinted they could turn active again.”