SoftBank’s bets gone all wrong: Highest ever loss in Q1 2022

SoftBank loss in Q1 2022 will be all-time high as the Vision fund unit alone would take a loss of $10 billion. The humongous loss was driven by South Korea's Coupang ($5.4 billion), Singapore's Grab Holdings Ltd. ($2.4 billion), China’s Didi ($2.4 billion), India’s Paytm ($1.3 billion), and the U.S. DoorDash Inc. ($1 billion)

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Softbank’s Masayoshi Son, a billionaire who is known for his aggressive bets on tech startups, is set to break another record, albeit an unpleasant one. SoftBank Group Corp.’s Vision Fund investment division may have lost a humongous amount of money in the March quarter, the highest ever since its existence. The company is all set to report earnings on Thursday.

In the March quarter, an estimated $18.6 billion was lost by the world’s largest tech fund on its public portfolio. Kirk Boodry, an analyst from Redex Research, who writes on SmartKarma, says that it’s quite surprising as the loss is more than the $18.3 billion drop in the fiscal second quarter. Boodry estimates that this would result in a loss of $10 billion for the Vision Fund unit, taking into account SoftBank’s stakes in each fund.

This is a dramatic reversal of what Son announced last year in Tokyo when he said SoftBank had made more money than any Japanese giant. His company, which he founded 40 years ago, made a net profit of $17.7 billion at that time. This surpasses Japan’s heavyweights like Toyota Motor Corp. or NTT Corp..

SoftBank’s fiscal year starts on 01 April and ends on March 31.

Boodry believes that the performance is not normal as it could have a far-reaching impact. He expressed his concerns towards investors and markets that are bound to become anxious.

To date, SoftBank has launched two Vision Funds, and both the funds have been hard hit by plummeting tech valuations amid the rise of global interest rates and China tightening its regulatory control on the industry. The Vision Fund has been hit hard by the collapse of the tech market in South Korea and China. South Korea’s Coupang and China’s Didi Global posted their worst quarterly share-price declines of 40% and 50%, respectively.

The Vision Fund suffered its largest loss, $6.32 billion, during the second quarter of fiscal 2012. This was due to global stock market crashes. However, in the following quarter, the unit returned to profitability by earning nearly $836 million during the three-month period ending Dec. 31.

In the end, it will also matter how SoftBank values its vast number of privately held companies in its portfolio. All eyes will be set on ByteDance Ltd. which runs the popular TikTok short-video platform and India’s OYO Hotels.

Market experts are not very optimistic about the company’s performance in the quarters to come. There is less visibility in this section of the portfolio, especially at Vision Fund 2, where many of these investments have been made on startups that are either very small or at an earlier stage. However, SoftBank will likely suffer significant losses in its private portfolio.

The plunging global stock market is another area of concern for SoftBank. The company’s business model is being affected by the sharp decline in the global stock markets. By grouping Vision Fund, Son repositioned the model into an investment holding company in 2016. However, the company face a huge blow after a series of scandals and blunders, mainly from WeWork Inc. and Wirecard AG, came to light which led to international scrutiny.

Son’s reputation has been damaged by rising concerns about further drops in the valuation of tech companies that are a part of the portfolio. They also have raised concerns about the business’ sustainability. Another factor that has fueled market anxiety is the lack of transparency about how much assets of the funds are pledged to banks and various financial institutions.

Amir Anvarzadeh, of Asymmetric Advisors, wrote that Softbank’s entire business structure depends on “ever-rising stock markets” specifically in tech stocks. This is what is driving the current market selloff. He said that the bear market is making this “fundamental flaw more obvious.”

According to Nomura Securities Co. analyst Daisaku Massuno, the Vision Fund lost money on 32 of 34 public holdings last quarter. The major portfolio companies that drove the humongous loss were South Korea’s Coupang ($5.4 billion), Singapore’s Grab Holdings Ltd. ($2.4 billion), China’s Didi ($2.4 billion), India’s Paytm ($1.3 billion), and the U.S. DoorDash Inc. ($1 billion).

Boodry estimates that the unrealized losses in the public portfolio ranged from $37 billion to $38 billion for fiscal 2021. The public portfolio companies are not doing well either as they have fallen more than half off their highs.

Interestingly, it’s all on paper mostly. SoftBank’s losses are on papers similar to the profits reported a year ago. The company’s transformation to an investment holding company means that it must log mark-to-market values for its holdings. Warren Buffett never gets impressed with it and he always argued that such quarterly figures for investment companies like his Berkshire Hathaway are almost meaningless.

SoftBank’s last quarter could still be a stumbling block for Son as he tries to reinvent and establish himself as the most distinguished venture capitalist in the world.

Son’s Vision Fund initiative was built on his track record of picking startups. This included a bet on China’s e-commerce giant Alibaba Group Holding Ltd., which became one of the most successful venture transactions of all time, and attracts the eyeballs of many HNIs and VCs. Alas, that deal is now in disrepute with Beijing’s crackdown against Jack Ma’s empire which has resulted in erasing more than 70% of Alibaba’s value since October 2020.

A lot can be understood from the performance of the Nasdaq 100, which is a key benchmark for tech shares. It has fallen 25% year-to-date and is on track to post its worst annual performance since 2008. After a 48% increase in 2020, the measure rose 27% last year.

Many tech-heavy funds have been affected around the world, including Chase Coleman’s Tiger Global Management. This fund is one of the most popular equity hedge funds over the past 20 years. The fund, however, posted the largest industry loss in 2022. This was due to the tech rout which helped erase $16 billion from long-only and hedge funds.

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