Japanese technology investor SoftBank Group (9984.T) is anticipated to report a financial setback when it announces its earnings next Monday, despite the strong quarterly performance of its core asset, Arm Holdings (O9Ty.F).
Although Arm’s shares soared in February following robust earnings, benefiting from the adoption of generative AI, its financial results do not directly contribute to SoftBank’s profits as it is a wholly-owned subsidiary.
The investor community is keenly looking for indications of new growth investments from SoftBank, given its substantial liquidity and ability to monetize its major stake in Arm.
The performance of SoftBank’s other listed investments was mixed during the quarter. Companies like Coupang (CPNG.N) and DoorDash (DASH.O) experienced stock price increases, whereas DiDi Global (92Sy.MU) and Grab Holdings (GRAB.O) faced declines.
The lukewarm IPO market has left analysts skeptical about the monetization potential of SoftBank’s unlisted tech startups portfolio.
Analysts forecast a net loss of 72 billion yen ($462.70 million) for SoftBank over the January-March period, a sharp contrast to the 985 billion yen net profit from the previous quarter, based on an average of two analyst polls by LSEG.
Despite the preparedness to engage in new growth investments, SoftBank’s management is adopting a cautious approach.
A significant, controlling acquisition similar to the $32 billion purchase of Arm in 2016 is speculated to be possible.
According to Nomura Securities credit analyst Shogo Tono, SoftBank could potentially fund up to $30 billion by leveraging its existing liquidity, recent bond proceeds, and negotiating a margin loan against its Arm stake.
However, the substantial emphasis on Arm within SoftBank’s portfolio is not without risks.
The high market valuation of Arm, which makes up nearly half of SoftBank’s equity value and is significantly higher than competitors like Nvidia (NVDA.O), is seen by some analysts as unsustainable.
Javier Correonero of Morningstar estimates Arm’s fair value at $57 per share, notably lower than its recent trading around $100.
Investor concerns were highlighted when Arm’s annual revenue forecast, disclosed at its quarterly earnings on Wednesday, led to an 8.5% drop in its stock price the following day, emphasizing the volatility and the potential for a significant market revaluation.