SoftBank: From a 300 year vision to the Nasdaq whale

SoftBank’s shares continued their slide today as investors continue to question SoftBank’s unusual option trades on Big Tech companies.

What happened? Long story short, SoftBank went all-in and more on Big Tech. It bought monstrous options that hinge on Big Tech stocks continuing their stratospheric rise. Although SoftBank earned over $4 billion in unrealized gains on these trades, investors are very concerned. 

• First, the gains are unrealized; they have not and can not be booked yet. In fact as soon as Big Tech stocks gave up some of their gains towards the end of last week, most of these unrealized gains evaporated. 
• Second and most importantly, engaging in option trades of this size represents a massive shift in the risk profile of the company. SoftBank started in telecommunications and its Founder and CEO - Masa Son - had a 300 year vision. However, it’s clear its investment strategy has changed and the company is very focused on the present and only the present.

The changes in SoftBank's risk profile reflect changes in the investment philosophy of its founder - Masa Son - who at one point, was considered to be the Warren Buffett of Japan. What changed and is Son a true visionary and a long term value investor?  

For years, Masa Son has been shifting SoftBank’s focus from telecommunications towards strategic investment in flashy tech companies. This stands in total contrast to Warren Buffett who has avoided technology stocks for most of his career, preferring to invest in companies he understands. In fact, with the exception of the recent investment in Snowflake, Buffet didn’t invest in any “unicorns” or any technology start-ups heading for an IPO. 

If Son's early telecom investments in Japan earned him plaudits and comparisons to the oracle of Omaha, his later foreign and tech investments did nothing but bruise his reputation. First came his miserable and highly leveraged investment in Sprint - the US wireless carrier that was sold to T-Mobile at titanic losses. Then came the write downs on Uber and WeWork where he suffered losses for the record books. 

After the coronavirus market tumult, SoftBank established an asset management unit for public investments using capital contributed by Masa Son himself. It also dumped more than $40 billion of assets. This was all good and for the first time in a long time, it looked like Son was copying a page from Buffet’s book on investing during a financial crisis. It was thought that Son would use the funds to shore up SoftBank’s balance sheet and wait to find “cheap” stocks to buy. I mean, that’s precisely what Buffett did when the pandemic hit. He dumped his stake in airlines because he no longer saw them as long term investments. He did not use the cash immediately to make investments. He saved it for the right opportunity.

For Son, the "right" opportunity presented itself when Big Tech stocks started to make their come back. He purchased $4 billion in Big Tech (Amazon, Apple, Tesla, Microsoft, Facebook, Alphabet) stocks. This sounds reasonable and is probably a shrewd long term investment. As mentioned in a previous article, the Fed’s monetary policy and the record low interest rates have left investors with no choice but to dump bonds and invest in stocks; more specifically Big Tech stocks. This is because the giant tech companies have all benefited in some way from societal shifts brought on by the pandemic — a surge in demand for everything from online shopping and streaming-video, to work-from-home software solutions etc. Hence, on paper, they are “safer” and better long term investments than the rest of the market. 

Then Son pulled a move that Buffet would have never done. He used the funds that were supposed to strengthen the balance sheet to buy monstrous options on individual Big Tech stocks. There is nothing that screams short term like options trading. With this massive gamble on Big Tech, Masa Son is playing Russian roulette and leaving SoftBank with $30 billion worth of exposure. 

While the trades appear to be successful as of now, as mentioned earlier the keyword is “unrealized.” Until SoftBank books a profit, investors will be praying it won't have to throw yet another Hail Mary.

What do you think of the future prospects of SoftBank? Is its founder and CEO- Masa Son-a true visionary or a massive gambler?


Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor.