Rising Rates And Antitrust Risks Will Crush AI Investments

Key Takeaways

• Global macroeconomic and regulatory challenges threaten SoftBank's investment strategy, pressuring earnings, portfolio valuations, and potential exits from key holdings.
  
• High-risk, concentrated investments in AI and underperforming IPOs create unpredictable cash flows and could jeopardize long-term shareholder returns.
  
• Strong AI investments, successful monetization of portfolio companies, and strategic asset management underpin SoftBank's future growth, earnings, and shareholder value.

Catalysts

Provides telecommunication services in Japan and internationally.

• The continued rise in global interest rates and higher cost of capital is likely to constrict SoftBank's ability to access cheap funding for its AI-focused investments, directly threatening its core investment model and potentially resulting in lower investment returns, pressured net margins, and diminished earnings growth over time.
  
• Increasing cross-border regulatory scrutiny and antitrust actions targeting large tech conglomerates, particularly in AI and data-related businesses, may curtail SoftBank's ability to invest or exit from strategic portfolio companies, reducing deal flow and undermining the future realization of gains that underpin revenue and net asset value growth.
  
• Geopolitical fragmentation, especially ongoing US-China decoupling and trade tensions such as new semiconductor tariffs, could severely limit exit opportunities for SoftBank's globally exposed tech holdings and depress portfolio valuations, leading to additional impairment charges and a weaker mark-to-market portfolio value that erodes earnings and book value.
  
• With persistent volatility and underperformance in some public portfolio company IPOs, including those previously cited like Arm and others dependent on robust AI adoption, SoftBank faces the ongoing risk of post-IPO disappointments and impairment charges cascading through future net income and NAV.
  
• Overreliance on speculative, high-concentration Vision Fund investments in unproven AI ventures introduces lumpy and unpredictable cash flows, while elevated ongoing R&D and infrastructure costs (such as delayed or over-budget projects like Stargate data centers) risk compressing free cash flow and net margins, jeopardizing the sustainability of long-term shareholder returns.

SoftBank Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on SoftBank Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SoftBank Group's revenue will grow by 3.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 23.6% today to 1.7% in 3 years time.
• The bearish analysts expect earnings to reach ¥140.9 billion (and earnings per share of ¥100.29) by about August 2028, down from ¥1735.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 87.0x on those 2028 earnings, up from 11.4x today. This future PE is greater than the current PE for the JP Wireless Telecom industry at 22.3x.
• Analysts expect the number of shares outstanding to decline by 2.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.95%, as per the Simply Wall St company report.

SoftBank Group Future Earnings Per Share Growth

Risks

• The rapid adoption and proliferation of artificial intelligence and generative AI, as evidenced by SoftBank's early investments and close partnership with OpenAI and growing ARR at OpenAI, could lead to substantial long-term value creation across SoftBank's portfolio, supporting higher revenue and asset growth.
  
• Upcoming IPOs and successful monetization of late-stage Vision Fund 2 companies like PayPay, Klarna, Chime, and others-many with strong user metrics or demonstrated profitability-could drive significant gains in SoftBank's earnings and net asset value.
  
• Arm's strong royalty revenue growth, expanding leadership in cloud and AI infrastructure, and expected continued market share gains position it as a core growth engine for SoftBank, with direct positive impact on revenue and long-term earnings.
  
• Continued balance sheet optimization, supported by asset monetization (such as T-Mobile share sales), low loan-to-value ratios, and previously executed share buybacks, may enhance net margins and deliver capital returns to shareholders, supporting a stronger share price.
  
• Expansion initiatives in AI-powered automation and large-scale infrastructure projects like the Stargate data center-combined with positive banking relationships and supportive financing-offer new, recurring opportunities for revenue and cash flow growth as global digital transformation accelerates.

Valuation

• The assumed bearish price target for SoftBank Group is ¥8000.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of SoftBank Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥17400.0, and the most bearish reporting a price target of just ¥8000.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥8206.9 billion, earnings will come to ¥140.9 billion, and it would be trading on a PE ratio of 87.0x, assuming you use a discount rate of 5.0%.
  
• Given the current share price of ¥13865.0, the bearish analyst price target of ¥8000.0 is 73.3% lower.
  
• 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.