[Business & Issues] SoftBank Hit Hard by Sharp Drop in US Tech Stocks, Is Its 'AI All-In' Strategy Shaking?

Disappointing Performance Exceeding Expectations... 174.2 Billion Yen Loss
Stock Price Plummets 46% in One Month... Impact of US Tech Stocks
Holding 90% Stake in ARM... Growing AI Concerns

[Image source=AFP Yonhap News]

SoftBank Group is showing a shaky trend as its stock price nearly halved within a month following the announcement of disappointing second-quarter earnings. The main factor is analyzed to be the deterioration of investor sentiment amid the recent sharp decline in U.S. tech stocks, while SoftBank has been focusing its investments in the artificial intelligence (AI) sector through its Vision Fund. Despite growing investor anxiety, SoftBank revealed plans to go all-in on AI by developing its own AI semiconductor through its subsidiary semiconductor company ARM, which is expected to increase stock price volatility for some time.

Second-quarter results worse than expected: "Due to exchange losses from yen depreciation"

[Image source=AFP Yonhap News]

According to Nihon Keizai Shimbun (Nikkei), on the 7th, SoftBank Group announced a net loss of 174.28 billion yen (approximately 1.631 trillion KRW) for the second quarter of this fiscal year (first quarter of the fiscal year). Market experts, including Bloomberg, had previously expected a profit of around 1 billion yen, but the company posted a loss. Unlike the previous quarter’s profit of 231.1 billion yen, it returned to a loss after three quarters. However, the loss was reduced compared to 477.6 billion yen recorded in the same period last year.

The Vision Fund’s technology investment division, a subsidiary investment fund, recorded a net profit of 1.9 billion yen, turning profitable. Although the Vision Fund’s technology investment division posted a loss of 57.53 billion yen in the first quarter, SoftBank explained that some of the portfolio companies generated profits in the second quarter, resulting in a profit. Along with this, SoftBank announced plans to repurchase up to 500 billion yen worth of its own shares (6.8%).

Despite the Vision Fund’s technology investment division turning a profit, SoftBank Group’s overall loss is analyzed to be due to the hundreds of unlisted startup companies invested in by the Vision Fund. Bloomberg pointed out, "While the solid performance of ARM, the semiconductor subsidiary, and a 20% increase in the stake in Coupang were positive, hundreds of loss-making startups still on the books are holding the company back."

Stock price plunges 46% in a month... Vulnerable to U.S. tech stock shock

The combination of worse-than-expected second-quarter results and the decline in major U.S. tech stocks caused SoftBank Group’s stock price to plummet more than 46% within a month. On the 11th of last month, SoftBank Group’s stock price hit a yearly high of 11,920 yen per share but sharply dropped to 6,400 yen on the 5th. Since then, it has remained stagnant around the 7,000 yen level.

The reason for the significant stock price fluctuation within a month is the equity assets concentrated in AI tech stocks. SoftBank holds a 90.6% stake in the UK semiconductor company ARM, which accounts for 55% of its total investment assets. Recently, as ARM’s stock price plummeted along with U.S. AI-related tech stocks, SoftBank Group’s stock price was directly hit.

The Wall Street Journal (WSJ) evaluated, "SoftBank Group Chairman Masayoshi Son is expected to focus more on AI investments going forward, but the outlook for the AI sector has become uncertain amid recent global stock market turmoil. The impact on the big tech sector will continue for some time, and especially the 40% drop in ARM, a subsidiary Son is concentrating on, since its July peak, had a significant effect."

"Plans to build data centers with proprietary AI semiconductors"... Competition with NVIDIA?

[Image source=Reuters Yonhap News]

SoftBank’s announcement to expand AI investments by installing data centers through ARM’s proprietary AI semiconductor development has also raised concerns. This is because a sustainable profitability model in the AI sector remains unclear, and competition with NVIDIA, the leader in the AI semiconductor market, is inevitable.

According to CNBC, ARM announced in May that it would develop AI semiconductor chips to replace NVIDIA’s graphics processing units (GPUs). The company plans to establish an AI chip division and begin mass production around fall 2025. It is reported that SoftBank Group will bear enormous initial development costs in this process, which is expected to further increase SoftBank’s earnings burden.

ARM’s proprietary AI chip development business aligns with Chairman Masayoshi Son’s AI-focused investment strategy. Since July last year, Son has expressed his ambition to transform SoftBank into an AI-centric company by investing a total of 10 trillion yen (approximately 93 trillion KRW). Son is pursuing a strategy that encompasses the entire AI sector, aiming to build data centers by early 2026 and expand business into robotics and the power industry.

However, as market skepticism about profitability in the AI sector grows, there are forecasts that Son’s AI-focused investment strategy may face difficulties. Marvin Lo and Chris Muckensturm, analysts at Bloomberg Intelligence, pointed out, "Recently, more focus has been placed on AI companies’ ability to generate profits, and excessive expectations for the AI sector are fading. SoftBank’s AI investment strategy carries considerable execution risks, so it will not be entirely smooth sailing."