One of the most compelling stories in the market this year has been the ongoings of SoftBank. From the incredible tale of WeWork to the Nasdaq Whale and the SoftBank SPAC, Masayoshi Son has provided us all with hours of entertainment.
The theme to all of these massive bets by SoftBank is that they're predicated on ideas, not things. The closest thing to Property, Plant, and Equipment SoftBank recently owned was T-Mobile, which Masa Son divested earlier this year after the company's merger with Sprint, and the chipmaker ARM, which is at its core an IP play. It's all about corporate finance, patents, and M&A, not something you can hold in your hand or dig out of the ground.
The funny thing is, SoftBank's strategy isn't exactly an outlier. In fact, the entire market has become more like SoftBank in recent years. Bloomberg recently wrote how intangible assets are the real winners of the market, because owning factories and E&P equipment isn't a very good business:
Investors have been falling over themselves to reward businesses that deemphasize humans. At a time people are kept at home and companies with fewer digital capabilities have struggled, firms that rely least on their employees compared with intangible assets have beaten labor-intensive ones by 37 percentage points in 2020
Even SoftBank's massive options bets were reflected by the broader market, as a bunch of bored youngins' on Robinhood pushed up retail options action to record levels this year (The Economist).
The Economist last week highlighted SoftBank's investing strategy, saying the firm's investment strategy is "wholly devoted to Mr Son’s technophilic passions," and that the pandemic helped validate this strategy.
The digital surge is helping the group’s underperforming Vision Fund, a $99bn tech-investing vehicle. The fund started deploying capital in 2017 in a cloud of hype and optimism but lost its way as a result of a few spectacular failures, most notably the implosion of WeWork, an office-subleasing firm masquerading as a tech platform.
For SoftBank, the big question moving forward is, will those two lines converge? Will SoftBank's market capitalization catch up to its net asset value? Investors aren't rewarding Masa Son with a higher multiple based on his holdings. That means there's more upside to SoftBank's market cap if the market is wrong - but it also increases the risk the value of those asset free-fall into the clutches of a pessimistic market.
What about us, the broader investing public?
There are two lessons to take from this story.
First, the same dynamic is happening with our own tech sector here in the US. Valuations of intangible assets are through the roof as we all now just sit at home watching Emily in Paris and ordering Prime groceries.
Second, despite all the uncertainty, Masa Son isn't pulling any chips off the table, and could go even more all-in. The Economist:
Investors do not expect the hyperactive Mr Son to sit on it for long. Three different paths appear open to him. One scenario is to activate long-discussed plans to take SoftBank private. Second, he may be preparing to take a large stake in one or more publicly listed technology giants... Third, he could double down on the Vision Fund model by putting more cash into the second vehicle and subsequent funds.
The WeWork fiasco proved that even the most sophisticated investors get it spectacularly wrong sometimes. One may want to consider that when they type TSLA or SNOW into their Robinhood buy order field.