SoftBank claws back into the black after historic losses

Just four months ago, Masayoshi Son, the daring billionaire who leads the Japanese conglomerate SoftBank, looked as if he might lose it all.

His company had just announced one of the largest annual losses of any firm in the history of corporate Japan. And tens of billions of dollars in investments he had made in high-tech industries like ride-hailing and hospitality looked set for even more devastating losses as the coronavirus pandemic limited the movement of much of humanity.

But Tuesday, SoftBank declared a seemingly miraculous turnabout: It announced that it had already swung back into the black, posting a $12 billion net profit for the three-month period that ended in June.

A potpourri of factors pushed SoftBank back into profitability, including aggressive asset sales, successful initial public offerings by firms in which it has invested, and stock prices for its publicly traded companies that have seemingly been divorced from the reality of a cratering global economy. Some of those companies are trading at higher levels than they were before the pandemic.

The whiplash change in fortune, more rocket launch than roller coaster, highlights the volatility of financial markets in the era of the coronavirus. It also shows how a company like SoftBank, which has used its $100 billion Vision Fund to become the world’s largest investor in tech companies, can find its strategies disrupted or catapulted by short-term market trends.

Speaking on a video chat with investors and reporters Tuesday, a somber Son said that his company had retrenched and was preparing for a long and difficult battle with Covid-19, which he said would make it difficult to predict SoftBank’s future performance.

Reaching back to 16th-century Japanese history, Son said that much as the Japanese warlord Oda Nobunaga had used guns positioned behind shields to win a decisive victory in a battle to unify Japan, SoftBank was stockpiling cash to use for strategic investments as part of its fight against the pandemic.

With the virus still spreading, he said, “every day is like a war, and we entrepreneurs also are fighting against various challenges.”

“I believe that cash is actually the defense for us,” he said.

He did not mention that Oda’s story did not end well: He subsequently died in an ambush.

Like Oda, Son sees himself as a transformational figure. He has frequently said he has a 300-year vision for his company, which he has tried to position as the leading investor in emerging technologies like artificial intelligence. His strategy has focused on making huge investments in companies, such as Uber, that he believes have the potential to transform and dominate entire industries.

But a series of missteps last year, including the spectacular collapse of the office-space firm WeWork, followed by the calamitous economic impact from the pandemic, forced Son to take a detour.

Whereas last summer Son found himself on the offensive, announcing the launch of a second, even larger, iteration of his Vision Fund, he now finds himself playing defense, saying that he has stopped seeking outside partners for the project as he builds up his cash reserves and considers a more cautious investment strategy.

In March, Son committed to selling off $42 billion worth of SoftBank’s assets to pay down the company’s gigantic debt and bankroll an aggressive campaign of share buybacks aimed at shoring up his company’s flagging share prices.

To achieve that goal, he has tapped his most valuable assets, selling down his holdings in his most successful investment, the Chinese e-commerce company Alibaba, as well as in T-Mobile and SoftBank’s mobile phone service provider in Japan.

So far, the tactic seems to be paying off. SoftBank’s share price has doubled from its low in March, reaching its highest levels in 20 years. The rise has been driven in part by similar comeback stories for SoftBank’s investments.

After a pandemic-induced market crash in the spring, investors have piled back into tech stocks, driving a rally in some of SoftBank’s flagship investments, including the workplace communications tool Slack, the medical technology company Guardant Health, and even Uber, which has managed to offset losses in its ride-hailing services with increased food delivery.

Perhaps most important, Alibaba has continued to deliver for Son, as the pandemic has sent its shares to record highs.

SoftBank has also benefited from a hotter-than-expected market for IPOs after disappointing performances by two of its biggest investments last year — Uber and WeWork — temporarily cooled market sentiment toward debuts by tech companies.

But appetite for the offerings has come roaring back. Last month, SoftBank scored hits with the listings of the insurance startup Lemonade as well as Relay Therapeutics, which develops cancer drugs. That raised investors’ hopes about the IPO prospects for other companies in SoftBank’s portfolio, and Son said Tuesday that five or six were making preparations to go public.

As of June, the Vision Fund had returned to overall profitability, the company said in its announcement.

But SoftBank’s sudden turnaround did not come without an asterisk.

The company used Tuesday’s announcement to introduce a change in the way it reports its results, saying it would no longer announce operating profit, as was its custom, because the measure was “not useful.”

Asked if the decision had made SoftBank less transparent and more difficult to value — a concern expressed by analysts who have questioned whether the company’s accounting of its interests in privately held companies is too optimistic — Son said that reporting operating income did not make sense for a firm that made its money by investing in other companies.

Son affirmed his belief that, in assessing his company, investors should look at “shareholder value” — a metric he defines as the value of the company’s holdings minus its net debt. By that measure, he said, the company’s value had increased by $31 billion since the end of the previous quarter, in March.

“This is the only and most important indicator to us,” he said.

As the second wave of the pandemic hits, he said, there is no “guarantee the performance of the Vision Fund will remain positive.” Nevertheless, the company has already used its own money to make 10 investments in Vision Fund II, Son said, adding that more investments were “in the pipeline.”

“It may not be a big amount of money, but we would like to add very good companies to our portfolio,” he said, hinting that a Vision Fund III was already in the works.

“Some investors and the media are fed up with the idea of investing in unicorns,” Son said, referring to privately held companies with a valuation of at least $1 billion.

But he said he saw the pandemic as an investment opportunity that might accelerate the transition to the kinds of AI-fueled companies he hopes to build his future investment portfolios around.

While the company may be on the defensive at the moment, its basic policy has not changed, he said. It is still “unicorn hunting.”