PayPay's Growing User Base Will Drive Future Value

Key Takeaways

• Strategic investments in AI and successful tech ventures are driving potential future revenue growth and long-term value creation.
  
• Improved profitability in consumer and financial segments, along with potential higher shareholder returns, strengthens SoftBank’s financial position.
  
• SoftBank faces revenue challenges in telecom and electricity segments, increased competition, and potential risks from CapEx investments and onetime financial factors.

Catalysts

Engages in the telecommunication and information technology businesses in Japan.

• SoftBank's focus on growing mobile revenue through increased subscribers and stabilized average revenue per user (ARPU) is expected to drive higher consumer segment revenues and operating income in the future.
  
• The success of PayPay, with increasing user numbers and transaction volumes, contributes to significantly improved profitability in the financial segment, potentially boosting net margins and earnings.
  
• The consolidation of WeWork and Cubic Telecom into the Enterprise segment suggests potential for enhanced solutions offering and income growth, which could positively impact overall revenue and net margins.
  
• Strategic investments and R&D in AI computing infrastructure, including generative AI, suggest future growth potential and could drive revenue and operating income enhancements, with a focus on long-term value creation.
  
• Strengthening of free cash flow, driven by cost efficiencies and improvements in primary free cash flow, indicates potential for higher net income and shareholder returns, including potential increased EPS through buybacks.

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 8.5% in 3 years time.
• Analysts expect earnings to reach ¥606.9 billion (and earnings per share of ¥12.87) by about December 2027, up from ¥508.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2027 earnings, down from 18.7x today. This future PE is greater than the current PE for the JP Wireless Telecom industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.29%, as per the Simply Wall St company report.

SoftBank Future Earnings Per Share Growth

Risks

• SoftBank's revenue in the electricity segment declined due to a decrease in subscribers, which could continue to negatively impact overall revenue growth if not addressed.
  
• The churn rate for SoftBank’s Y!mobile increased, indicating potential challenges in customer retention that could affect future revenues and net margins.
  
• Intense competition from other telecom carriers like DOCOMO and KDDI could pressure SoftBank to engage in price wars, potentially squeezing net margins if acquisition costs become too high.
  
• The pace of CapEx investment, especially in AI and other technological infrastructures, might constrain free cash flow and impact net income if the returns do not align with the expectations.
  
• Onetime factors positively influenced the financial results in several segments; reliance on such irregular factors poses a risk to sustainable growth and could affect predictable earnings.

Valuation

• The analysts have a consensus price target of ¥211.08 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 2027, revenues will be ¥7149.8 billion, earnings will come to ¥606.9 billion, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 4.3%.
• Given the current share price of ¥200.6, the analyst's price target of ¥211.08 is 5.0% 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.