SoftBank Group Corp. founder Masayoshi Son has delivered a clear response to critics who thought the twin disasters of WeWork and the coronavirus would bring down his empire: not just yet. The Japanese technology giant\u2019s shares have more than doubled from their March low, propelled by buybacks and improving market conditions for its portfolio companies. They gained another 3.6% on Monday after the story was published. SoftBank bonds, which traded at less than 65 cents on the dollar in March, have recovered to near par. Son, 62, has seen his own net worth soar to $20 billion, the highest since the Bloomberg Billionaires Index began tracking his wealth.<\/p>\n\n\n\n
Plenty of investors remain skeptical of SoftBank and Son himself. Still, multiple factors suggest more room for short-term gains: Earnings are set to recover from last quarter\u2019s record loss, shorts are under pressure to cover losing bets by buying shares and SoftBank\u2019s share buybacks of as much as 2.5 trillion yen ($23.4 billion) are just getting started.<\/p>\n\n\n\n
\u201cThe share price can still double,\u201d said Richard Kaye, Japan equity analyst and portfolio manager at Comgest Asset Management, which holds a $60 million stake in SoftBank. There has been too much focus on WeWork, he says, and not enough on the \u201ceight or nine things that have gone very right.\u201d<\/p>\n\n\n\n
Son has made a career out of confounding his doubters. After backing hundreds of startups during the dot-com boom, Son lost a record $70 billion as almost all those companies failed, leaving SoftBank\u2019s future in doubt. Yet he slashed costs and survived. In 2006, he acquired the Japan unit of Vodafone Group Plc in a widely panned $15 billion deal that few thought would pay off. Son turned the business around, in part by persuading Apple Inc.\u2019s Steve Jobs to give him exclusive rights to the iPhone in Japan.<\/p>\n\n\n\n
Yet the past year proved the Japanese entrepreneur\u2019s most challenging in decades. After refocusing SoftBank on technology investments with the $100 billion Vision Fund, several startups he had backed ran into trouble, culminating with WeWork\u2019s disastrous flop. The coronavirus pummeled SoftBank\u2019s investments in the so-called sharing economy, businesses built on people splitting the use of cars, rooms and offices. Credit default swaps, the cost of insuring against default, spiked to the highest level in a decade.<\/p>\n\n\n\n
Son had a lifeline this time around, however, that he lacked during the dot-com bust: his stake in Chinese e-commerce giant Alibaba Group Holding Ltd. worth more than $150 billion that could be sold for cash at any time. In March, just days after a record plunge in its shares, SoftBank said it would sell 4.5 trillion yen in assets. That has helped fund a record pace of stock buybacks this year \u2014 and they\u2019re far from over.<\/p>\n\n\n\n
SoftBank has announced three buybacks this year, completing only one of them, a 500 billion yen program announced March 13. While that was wrapped up June 15, the company has already announced two separate programs totaling 1 trillion yen \u2014 a further 1 trillion yen has been promised, but not yet committed.<\/p>\n\n\n\n
SoftBank\u2019s pattern of buying its shares is also significant. In line with Tokyo Stock Exchange guidelines, buybacks stopped for five days before the fiscal year-end in March. In April, having bought every day that month, buybacks suddenly paused for an entire month, during which SoftBank announced earnings. Ahead of that halt, however, the amount bought each day surged to triple the usual amount for five consecutive days. Many of these days saw outsize moves in SoftBank stock \u2014 rising by 5.2% one day, and 6.9% on another. With earnings just over a month away, the current pace may increase in a similar pattern.<\/p>\n\n\n\n
SoftBank said it would follow stock exchange guidelines for repurchases, without providing any more detail.<\/p>\n\n\n\n
At the same time, margin sales on the Tokyo Stock Exchange are at the highest level since December 2012, according to data from the bourse. Sales on margin, a type of short-selling, represent bets against the company \u2014 which many investors had also tried in 2012 following the announcement of its Sprint Corp. acquisition.<\/p>\n\n\n\n
But those who bet against it eight years ago lost out \u2014 in the first six months of 2013, as margin sales dropped, the stock more than doubled. History might repeat itself. If the upward pressure from the buybacks is sustained, that could force shorts to cover their positions, sending the stock even higher.<\/p>\n\n\n\n
\u201cThe shorts got this one wrong,\u201d said Ikuo Mitsui, a fund manager at Aizawa Securities Co. \u201cGoing forward there\u2019s likely to be more short-covering which will make it harder for the share price to drop.\u201d<\/p>\n\n\n\n
In recent months, Son has argued the key metric for SoftBank investors shouldn\u2019t be profit or revenue but shareholder value, specifically the equity value of the company\u2019s holdings minus its net debt. \u201cYou should look at shareholder value, how much gain or a loss the company recorded, because we are an investment company,\u201d he said earlier this year.<\/p>\n\n\n\n
In fact, SoftBank has taken to providing its own daily calculation of what its shares should be worth, based on its equity holdings of Alibaba, T-Mobile US Inc. and the domestic wireless operator SoftBank Corp. As of Friday, shareholder value stood at 13,230 yen, according to SoftBank, more than twice its share price even after the run-up of more than 130% from its March low.<\/p>\n\n\n\n
SoftBank has benefited from a rebound in its portfolio of companies, particularly Alibaba. The e-commerce giant hit record after record this year, with its market valuation pushing past $700 billion. Uber Technologies Inc., a key Vision Fund investment, has more than doubled since its mid-March trough.<\/p>\n\n\n\n
The macroeconomic environment is also improved in recent months. Jefferies analysts including Atul Goyal wrote in a May report that the Federal Reserve support of the U.S. market is a boon for SoftBank. With the Fed backstop for investment grade and high-yield bond market, they write, \u201ca lot of that excess money supply and liquidity is likely to flow to higher-yielding investments.\u201d<\/p>\n\n\n\n
There are signs that SoftBank\u2019s portfolio of startups will face an improved reception as they look to go public. Online home-insurance provider Lemonade Inc., one of Son\u2019s investments, more than doubled after its initial public offering this month.<\/p>\n\n\n\n
The company\u2019s debt has also recovered. SoftBank\u2019s 6.875% perpetual dollar bonds plunged in March to as low as 64 cents on the dollar and have since recovered to around par on Thursday, according to data compiled by Bloomberg.<\/p>\n\n\n\n
\u201dSoftBank executing on its asset sale target is a positive for the credit,\u201d CreditSights analyst Mary Pollock said.<\/p>\n\n\n\n
On Thursday, SMBC Nikko analyst Satoru Kikuchi raised his price target for SoftBank, using a sum-of-the-parts model that lifted his valuation 11% to 7,000 yen.<\/p>\n\n\n\n
Risks \u2014 and skeptics \u2014 remain. A surge in virus cases in the U.S. could still break the Fed\u2019s magic spell over the markets, while the U.S.-China trade war could disrupt business and upend companies like Alibaba. Investors also fret that Son will be tempted to bail out troubled portfolio companies, like he did with WeWork.<\/p>\n\n\n\n
Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co. in Tokyo says he personally wouldn\u2019t suggest going overweight on SoftBank given how fast the stock has risen over the past couple of months.<\/p>\n\n\n\n
But for Son\u2019s fans, the inscrutable billionaire has pulled off yet another escape from the abyss.<\/p>\n\n\n\n
\u201cAs the market starts to realize the strength of SoftBank\u2019s position,\u201d said Comgest\u2019s Kaye, \u201cthere will be a proper reassessment of SoftBank\u2019s share price.\u201d<\/p>\n\n\n\n
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