Earlier today, the Japanese investing conglomerate Softbank (OTC:SFTBY) Group. (TYO:9984) reported a 2.93 trillion Japanese yen ($21.68 billion) loss for its Vision Fund for the fiscal first quarter, one of the biggest losses for the conglomerate's investment arm amid a sharp stock market drawdown this year.
The Vision Fund's loss led to a record 3.16 trillion yen ($23.5 billion) net loss for SoftBank in Q1, compared to a 761.5 billion yen profit in the year-ago quarter.
Huge Losses as Tech Stocks Take a Beating
The substantial loss comes as the technology-focused Vision Fund has seen significant damage after a steep decline in high-growth stocks in 2022. The huge selloff is a result of the 4-decade high inflation and the consequent aggressive rate hikes by the Federal Reserve and other global central banks.
Some of SoftBank's portfolio companies that sustained significant share price drops include the robotics company AutoStore, AI firm SenseTime, South Korean e-commerce company Coupang, DoorDash, and others.
The conglomerate also said it wrote down the value of unlisted assets across its two investment arms by 1.14 trillion yen, a move that was unlikely to indicate the true extent of the ongoing market drawdown, according to analysts. Stakes in the Vision Fund II's 269 businesses had a combined worth of $37.2 billion and the end of the June quarter, compared to the buyout cost of $48.2 billion.
The Japanese conglomerate said it saw a slump in stock prices for numerous of its portfolio companies due to "the global downward trend in share prices due to growing concerns over economic recession driven by inflation and rising interest rates." Furthermore, SoftBank said the share prices of its private portfolio companies are also in the red.
"The market and the world are in confusion," Son said. For that reason, SoftBank has been increasingly selective when making investment choices, he added.
SoftBank still hopes to list the chipmaker Arm after its deal with Nvidia (NASDAQ:NVDA) collapsed as the ongoing market turmoil and declining IPO volumes have affected the conglomerate's key source of capital. The investing business has previously relied heavily on public debuts of its private portfolio companies to secure funds, which it would later use to finance other startups.
However, the steep drawdown in equities this year has been making it very challenging for companies to launch an initial public offering (IPO), especially for those in the tech industry. Moreover, it is getting more and more expensive to borrow money in the current macroeconomic environment.
For instance, fintech startup Klarna raised $800 million in new funding last month at a valuation of $6.7 billion, marking a drop of 85% compared to the $45.6 billion valuation in the summer of 2021.
Hence, it comes as no surprise that SoftBank has been recently offloading its stakes in certain companies to raise funds. The Japanese conglomerate said Monday that it sold stakes in several companies over recent months, including ride-hailing giant Uber (NYSE:UBER) and Opendoor (NASDAQ:OPEN). The sales have helped SoftBank nab $5.6 billion from these sales, it said.
Moreover, the Japanese giant said it secured almost $10.5 billion in the June quarter after selling its Alibaba (NYSE:BABA) stake through a forward contract.
The CEO also said the Vision Fund might have to reduce its workforce significantly. The move may indicate that a similar action might be taken at other units as well.
Despite huge losses, SoftBank still approved a 400 billion yen stock repurchase plan on Monday.
Change of Strategy
In July, SoftBank said the company would adopt a more "conservative" approach to its investments following Vision Fund's 3.5 trillion yen loss for the last fiscal year. CFO Yoshimitsu Goto said:
"Over the next 6–12 months, we will closely monitor risk factors, be prepared for further downside and continue to practice prudent management and take a more conservative approach."
Son said he feels embarrassed that he got so excited after high-growth technology stocks skyrocketed last year, adding the first Vision Fund was "making big swings and couldn't hit the ball."
The Vision Fund II was more systematic in its investment efforts, Son explained, saying the fund has been allocating smaller amounts of funding each round in a bid to boost profitability. The Korean-Japanese billionaire also said he was emotionally attached to certain portfolio companies, but he has learned his lesson since. Son added:
"Rather than aiming for the home run ... (we) try to aim for the first base or second base hit."
According to SoftBank's filings, the conglomerate's latest fund poured $38 billion into 183 companies in 2021, despite Son's pledges to be more selective in investing. This marks the largest-ever amount invested by a VC investor in a single year.
However, the current environment represents a common position for Son and his team, which have historically invested billions of dollars in the tech sector as prices soared, then suffered major losses during subsequent bear markets.
Overall, Son has recorded significant success over the past years, with startups being the conglomerate's latest focus. Since SoftBank's most recent earnings report, the publicly traded shares of Vision Fund I and II have dropped by a total of $9 billion.
Apart from losing money, Son and SoftBank have also seen some of their key people leaving the company. Rajeev Misra, who was in charge of startup funds, stepped down from his role in July following a series of other departures.
Still, Vision Fund II remains the primary concern for Son. SoftBank committed $56 billion in its second Vision Fund, but analysts believe that its losses this year could be close to those of high-growth tech stocks, which are roughly 60% down from their all-time highs.
"I'm a lot more worried about Vision Fund 2 than I am about Vision Fund 1, and I have very little faith in a lot of the Vision Fund 1 investments," said Mio Kato, an analyst and founder of Lightstream Research. Its losses result from a strategy of "just very aggressively betting on the dream, regardless of facts," Mr. Kato added.
Summary
Softbank posted a record quarterly loss on the back of the falling valuations in the high-growth tech sector. Still, CEO Son said he remains optimistic about SoftBank's future prospects as he believes that the tech sector will rebound.
Until then, the conglomerate will continue cutting back on its startup bets and focus on accumulating "lots of cash." How they plan to do that in the environment of rising interest rates and economic slowdown remains to be seen.