|Shares Out. (in M):||3,446||P/E||0||0|
|Market Cap (in $M):||96,500||P/FCF||0||0|
|Net Debt (in $M):||105,000||EBIT||0||0|
|TEV (in $M):||201,500||TEV/EBIT||0||0|
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I think now is a compelling time to buy SFTBY. The company was last written up by rhianik in Feb 2020 and I would suggest starting by reading that. I will fill in major changes since then but am writing this with the expectation that readers have already read that. The company provides a lot of information and does its own NAV calculations so I expect those interested to do their own research and valuation adjustments.
SoftBank is a discount to the SOTP situation. It can also be thought of like a close-end investment company trading at a large discount. I don’t seek out this types of investments but I have always found it odd how much most investors hate discounted SOTP investments. I personally have had a lot of success in these types of situations. I owned Yahoo when it was essentially a deeply discounted tracking stock for BABA and did well as the company liquidated and ultimately “reverse-spun-out” it’s stake. I owned DVMT when it was a deeply discounted tracking stock to VMW and still own DELL currently (although I continue to shrink it as the discount shrinks). I even got lucky playing the Pershing Square arb (owning PSTH and shorting the underlying) as Ackman made over 20% on a market hedge in 2020 (the discount remained around the price I entered but I earned the trading PnL). I also posted to VIC the convertible notes of a discounted close-end investment company called Global Silicon Valley (later renamed Sutter Rock Capital, later renamed SuRo Capital) and did well as the stock went from a 40% discount to NAV to a 20% premium.
I mention these not to brag but to pre-emptively respond to negative push-back on discounts to NAV. In each of these cases, I had no special insight. Each of these were incredibly well known (and generally, oddly despised). So to anyone that says, “you didn’t tell me anything that the market doesn’t already know,” I concede. I don’t think special knowledge is always required for a satisfactory investment and I highlighted 4 “discount to NAV” situations above that worked exceptionally well without special insight. I believe patience and an appropriate entry point are all that are required. I personally find discounts to NAV investments work really well if two criteria are met: 1) you think NAV will grow at a reasonable rate (i.e. you would be OK owning at NAV if you knew you could also exit at NAV) and 2) either a) management is taking active steps to reduce the discount / create shareholder value or b) incentives are aligned with management and you think eventually they will take the active steps if necessary to reduce the discount / create shareholder value. I think SFTBY meets both these criteria. In this case, as was the case with DVMT/DELL, the discount is so large and I like the underlying assets enough, that I think I’ll do fine even if the discount persists. Basically, I think there’s a low risk of the discount blowing out further and I think just NAV/share increases will suffice for an attractive return. A closing of the discount is just a bonus (like a P/E multiple expansion for an operating business). The beautiful part of large discounts to NAV (or low PEs) is that significant shareholder value is created (NAV/share increases) just by simply buying back stock, rather than requiring anything to happen with the underlying portfolio.
Back to SoftBank (“SB”). SB did not always trade at a large discount to NAV:
The stock price tracked the NAV reasonably closely until roughly late 2015. I suspect SB and its founder Masayoshi Son were well revered from its founding in 1981 until this point (a little before my time). He hit a homerun with his investment in Yahoo! Inc and the creation of Yahoo Japan in the 1990s and made one of the greatest investments of all time in 2000, buying 30% of Alibaba for $20 million. Fast forward to 2013 and SB makes its largest acquisition in the company’s history by orders of magnitude, buying 78% of Sprint for $22 billion, roughly half its market cap at the time. The market celebrated the acquisition on the hopes of a merger with T-Mobile with Sprint shares roughly doubling, sending SB’s NAV and share price higher commensurately.
The merger was unsuccessful which sowed the seeds for the unraveling of the narrative around Masa, from a brilliant visionary to a reckless risk-taker that got lucky in the past. Equity markets weakened in late 2015 and fears around the debt-laden, money-losing Sprint going bankrupt swirled.
Shortly thereafter, SB sets a new record for its largest acquisition ever, buying 100% of Arm Holdings for $31 billion. Sentiment around Masa following this acquisition further deteriorated as it was generally viewed as overpriced and another “bet the farm” gambit by Masa to make up for the Sprint debacle.
From here, the story is reasonably well known as we are getting closer to present day. Headlines and click-bait of Masa being an irresponsible gunslinger continue – WeWork, Katerra, Greensill, gamma squeeze of big tech, etc. – leaving SFTBY languishing at a discount of 30-60% of NAV despite the excellent growth in NAV/share:
Narrative vs. Reality
As mentioned above, the narrative around SB/Masa has been strained since the original failed merger between Sprint and T-Mobile. It seems as though SB has had a difficult time making it more than a year without a new boogeyman that scares investors.
· Failed merger with T-Mobile
· Over-leveraged, burning cash, SB’s equity will be worth 0 wiping out $22 billion
· Merger closed in 1Q20
· SB sold $20 billion in 2020 and still holds a stake worth $15 billion
· OK investment
Arm Holdings (2016):
· Overpriced ($31 billion)
· Reckless swing by cowboy to remedy Sprint debacle
· Sold to NVDA last year for $40 billion, receiving $2 billion in non-refundable cash
· Worth $60 billion today based on NVDA’s current share price if deal goes through
· Significant interest from strategics if deal is blocked – expect successful IPO if not sold
· Excellent investment
SoftBank Vision Funds (2019):
· Disaster, raised too much money, doesn’t do proper due diligence
· Couldn’t get outside investors for SVF2, straining balance sheet
· WeWork, Katerra, Greensill, etc.
· CPNG is a 9x, generating $21B in profits
· SVF1 has generated $58B in profits, 2.5x MOIC, 43% IRR
· SVF2 still early but looks very promising, 2.5x MOIC
· LatAm Fund doing very well, separated to its own segment
Call Options on Big Tech (2020):
· Reckless, cowboy, irresponsibly, etc.
· I concede this was concerning, do not like seeing this – hope it was one off
· SB stated it will wind-down its derivative strategy
· It appears SB ultimately broke even on these trades after large gains initially
VIC is an incredible repository of past analyses of businesses and sentiment at the time. SB has been written up on VIC 4 times (Feb 2014, Dec 2014, Jul 2016, Feb 2020). In each case, the pitch was a discount to the SOTP with a constructive view on the underlying portfolio. The comments are also beneficial – they excellently cover the general narrative I describe above. The current stock price is higher than what when it was posted in each of the 4 write-ups, but unless an investor exited in April or May of this year, the IRR has been below the market return which is why I believe now is compelling time to enter.
All prior boogeymen have been alleviated with good to excellent results and the newest problem is now Alibaba. Alibaba has always been a massive piece of the SB portfolio, so with Alibaba down 50% from its highs, SB share price will suffer. I own Alibaba outright and also like the exposure to it via SoftBank. While a compression of the discount to NAV is something I expect, I think an investor should only buy SB stock if they like owning the underlying portfolio (notably BABA which is 40% of the total portfolio and more than 100% of the NAV).
What will cause the discount to shrink?
I again refer to my chart above showing the amount of the discount over the past three years. Discounts of this magnitude are not static so I think trying to time them makes some sense. Earlier this year at SB’s all time high share price, the discount narrowed to slightly more than 20%. This occurred despite a decline in the company’s NAV due to the decline in Alibaba’s share price. My chart shows a current discount of over 60% but that’s because it uses the company’s stated NAV as of 6/30, when BABA’s share price was significantly higher. As I mark positions to market, I calculate a current discount of 45-50%, still towards the wide end of the range going back 5 years (when the discount to NAV began to blow out). Generally, discount to NAV situations are volatility suppressants as the discounts typically shrink when the underlying portfolio declines and widen as the portfolio increases (this was certainly the case with DVMT tracking VMW) but this is an interesting situation where the discount has blown out to the wide end of the range congruent with the decline in the value of the portfolio (a double whammy for SB). I believe we will see this discount compress even with just a stabilization of BABA’s share price. As NAV/shr increases I think we see the "double whammy" in reverse.
Major share repurchases are always a remedy to close NAV discounts. SB has repurchased nearly $30 billion stock since Feb 2019. It’s most recent repurchase of 1 trillion yen ($9 billion) was at a price of 9,375 (on 9984 JP), 50% higher than where the stock currently trades (repurchase was before the latest leg down in BABA’s stock). It was also during this repurchase period that the discount to NAV compressed from 50% of NAV to almost 20%, certainly not a coincidence. They have reduced the share count by 22% in this 2.5 year period alone and I don’t think they are finished. Masa has increased his ownership in the company from 19% to 27% over the past 5 years due to share repurchases alone.
I look forward to any questions or comments.
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