SoftBank just reported its financial earnings for the quarter ended on the 30th of June, and as I am writing, its shares are trading 10% higher on the day to a fresh all-time high. 3 months ago, I wrote “SOFTBANK GOES ALL IN ON AI WITH THE LITTLE MONEY IT HAS LEFT” and this is how the WSJ commented on the results SoftBank just released: “SoftBank Group Posts Quarterly Profit as AI Bet Pays Off“. Great, Masayoshi Son gambled and he won the bet. Mmm, not really.
1 – Vision Funds Investments reported a total net gain of ~451 billion JPY in the quarter. What was the driver of it? ~ 1 trillion JPY of unrealized gains in the quarter. In other words, SoftBank took a pen and revised higher all mark-to-market valuations of its Vision Funds investments. This isn’t the most interesting thing, though. As you can observe in the table below, SoftBank recorded EXACTLY the same amount of unrealized investment gain one year ago. What are the chances? You tell me…
Different from a year ago is the amount of losses recorded from investment liquidations, and voilà! Because of selling fewer holdings at a loss and adjusting mark-to-market valuations higher (despite every time investments are sold, losses are recorded), SoftBank can report a chunky gain in its Vision Funds investment business. As a result, as you can see in the table below, the increase in cash held by SoftBank Vision Funds was minimal and remains near zero.
2 – While SoftBank conveniently adjusted the value of its private investments higher, the performance of its investments in publicly listed stocks goes in a diametrically opposite direction. On this front, SoftBank reported an investment LOSS of ~256 billion JPY:
- ~402 billion JPY Loss on T-Mobile shares
- ~171 billion JPY Loss on Alibaba shares
- ~210 billion JPY Gain on Nvidia shares
If you quickly do the math, SoftBank’s “AI bets paying off” is simply the result of gains recorded on Nvidia shares. How convenient, right?
Hold on, didn’t SoftBank hedge its losses on Alibaba via derivatives a long time ago, as we discussed in “IN A SCRAMBLE TO SURVIVE, SOFTBANK IS KILLING ALIBABA!“? Yes, it did. Thanks to prepaid forward agreements, SoftBank managed to “dump” Alibaba shares without technically selling them. Consequently, in this quarter, SoftBank reported a derivatives gain on these contracts linked to Alibaba shares of ~143 billion JPY. Here is where things become murky, though, because SoftBank lost ~171 billion JPY on Alibaba due to the settlement of the aforementioned pre-paid forward derivatives contracts.
How did SoftBank’s cash increase by ~472 billion JPY compared to the previous quarter? Very simple: the company managed to raise more debt.
Compared to one year ago, SoftBank recorded a cash drain of ~1.3 trillion JPY.
And this, as usual, brings us to take a look at its financial stability, which remains precarious (to say the least):
- Total Current Assets: ~9.7 trillion JPY (of which ~4.2 trillion JPY of Cash and Equivalents)
- Total Current Liabilities: ~11.6 trillion JPY (of which ~5.2 trillion JPY of interest-bearing debt and ~2.3 trillion JPY of deposits from the banking business).
Clearly, SoftBank will continue to be forced to sell its liquid assets at a loss because it has no alternative, considering banks are increasingly reluctant to lend more and more money to the company. Loans that, for the most part, are “guaranteed” by the following “non-current assets” of very questionable value:
- Investments accounted for using the equity method: ~675 billion JPY
- Investments from SVF (FVTPL): ~ 12.5 trillion JPY
- Investment securities: ~ 6 trillion JPY
- Derivative financial assets: ~185 billion JPY
To conclude, and to give an idea of how precarious SoftBank’s financial position is, the company disclosed in its latest earnings that it needed a 1 billion USD refund from OpenAI in its latest funding round led by SVF2 and that was totally paid for the part due from the fund with borrowed money lent by Japanese banks and, of course, accounted off the books.
How will SoftBank be able to pay for the remaining 20 billion USD funding it committed to OpenAI? How will SoftBank be able to pay for its part in the 500 billion USD “Stargate” project it promised to President Trump? How can SoftBank remain in business if it’s dependent on constantly raising short-term debt to support its operations? I have no idea, but surely they bought one more quarter of time thanks to the incredible accounting shenanigans Masayoshi Son keeps using, and nobody pays attention to. Investors apparently love this and are sending SoftBank’s share price to the stratosphere. Apparently, all of them forgot what happened roughly 25 years ago when Masayoshi Son used the exact same playbook he is using today.
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