(This May 10 story has been corrected to determine this arm is a subsidiary, but not a wholly-owned subsidiary, of SoftBank (TYO:) Group, per paragraph 3)
Written by Anton Bridge
TOKYO (Reuters) – Japanese technology investment group SoftBank Group is expected to dip back into the red when it reports earnings on Monday even though technology stocks including Arm Holdings (NASDAQ:), its underlying assets, performed well during… Quarter.
Analysts and investors are also eagerly awaiting clues about new growth investments as SoftBank has ample liquidity and can monetize its huge stake in Arm.
The stock price of British-based Arm, in which SoftBank has a 90% stake, nearly doubled in February after strong earnings results got investors excited about Arm's expected gains from adopting generative artificial intelligence (AI), but Arm's stock price is not rising. It fuels SoftBank's profits because it is a subsidiary.
SoftBank's other listed assets performed mixed during the quarter – with shares in Coupang and DoorDash (NASDAQ:) rising but DiDi Global and Grab Holdings falling. The initial public offering (IPO) market remained weak, leaving analysts uncertain about the monetization prospects of SoftBank's portfolio of unlisted technology startups.
SoftBank is set to post a net loss of 72 billion yen ($462.70 million) during the January-March period, according to the average of two analysts polled by LSEG, compared with a net profit of 985 billion yen in the previous three months.
SoftBank's management said it was ready to make new investments for growth, but stressed that it would adopt a cautious approach.
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New investments were minimal in the October-December quarter, but analysts say a large, controlling acquisition — similar to its $32 billion purchase of Arm in 2016 — could be in the offing.
SoftBank could finance up to $30 billion by combining the liquidity it has on hand as of the end of 2023, proceeds from bonds issued in March, and by negotiating a margin loan on its stake in Arm, Nomura Securities credit analyst Shogo Tono calculates.
But while ARM's stake may make investing on this scale possible, its dominance within SoftBank's portfolio poses a risk if market sentiment shifts, hurting SoftBank's value and ability to raise money.
Arm is currently trading at premium valuations that far exceed competitors like Nvidia (NASDAQ:) which has pushed it to make up nearly half the value of SoftBank shares.
Some analysts warn that this is not sustainable. Moningstar analyst Javier Correonero estimates Arm's fair value at $57 per share, compared to its recent trading range of about $100 per share.
Investors were disappointed with Arm's annual revenue forecast in its quarterly earnings on Wednesday, sending its shares down as much as 8.5% the next day, underscoring the risk of a significant rerating.
($1 = 155.6100 yen)
