Investments In AI And OpenAI Partnership Will Create New Technological Efficiencies

Key Takeaways

• Consolidating banking and security services into PayPay and AI infrastructure investment are likely to boost revenue and net margins.
  
• Strong performance in Enterprise and Media segments, including ZOZO, is expected to enhance revenue and net earnings.
  
• Heavy investments in AI and infrastructure, alongside complex subsidiary management, may strain earnings and financial health if costs outweigh near-term revenue growth.

Catalysts

Engages in the telecommunication and information technology businesses in Japan.

• SoftBank is planning to consolidate its banking and security services into PayPay to accelerate growth, which is expected to drive financial segment revenues and increase overall earnings.
  
• Investments in AI computing infrastructure and a partnership with OpenAI are expected to create new revenue streams and possibly improve net margins through technological advancements and efficiencies.
  
• The ongoing stable growth in the consumer mobile segment, driven by increased subscribers and ARPU stabilization, is anticipated to boost revenue and contribute positively to net earnings.
  
• The continued double-digit growth within the Enterprise segment, supported by newly consolidated subsidiaries, is likely to enhance revenue streams and contribute to overall earnings growth.
  
• Expansion in the Media and EC segment, with entities like ZOZO showing strong performance, is likely to drive higher revenue and improve net income through diversified income sources.

SoftBank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SoftBank's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 9.0% in 3 years time.
• Analysts expect earnings to reach ¥650.1 billion (and earnings per share of ¥13.74) by about March 2028, up from ¥518.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥558.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2028 earnings, down from 19.5x today. This future PE is lower than the current PE for the JP Wireless Telecom industry at 18.5x.
• Analysts expect the number of shares outstanding to grow by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.59%, as per the Simply Wall St company report.

SoftBank Future Earnings Per Share Growth

Risks

• The company's investment in GenAI and AI infrastructure, although poised for future growth, may lead to increased expenses in the near term, impacting net income until these investments reach the breakeven point.
  
• The ongoing efforts and investments in new segments such as Sakai plant and OpenAI collaboration pose a risk of high upfront costs without immediate returns, potentially affecting operating income and overall earnings.
  
• The decline in electricity service revenue due to decreased subscribers, despite improvements in procurement costs, indicates a risk of reduced revenue in that segment if the trend continues.
  
• Increased sales promotions and customer acquisition initiatives, while potentially boosting revenue, also result in higher costs, which could compress net margins if not balanced effectively against revenue growth.
  
• The complexity and the financial burden of managing multiple subsidiary brands and structures, as highlighted by devaluation losses and interest payments, could strain the overall corporate financial health, impacting net income and shareholder equity.

Valuation

• The analysts have a consensus price target of ¥215.846 for SoftBank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥270.0, and the most bearish reporting a price target of just ¥183.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥7246.6 billion, earnings will come to ¥650.1 billion, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 4.6%.
• Given the current share price of ¥213.1, the analyst price target of ¥215.85 is 1.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.