AI Initiatives And Partnerships Will Shape Future Opportunities But Could Bring Financial Challenges

Key Takeaways

• SoftBank's strategic focus on AI, including investments in AI chip design and enterprise systems, aims to significantly increase its revenue and market presence.
  
• Enhancing financial stability through IPOs of Vision Fund companies and leveraging project financing could boost earnings and improve net margins.
  
• Earnings volatility and financial setbacks arise from foreign exchange fluctuations, investment losses, and risks associated with new projects and Vision Fund portfolio companies.

Catalysts

Provides telecommunication services in Japan and internationally.

• SoftBank's extensive focus on the AI revolution, particularly through investments in AI chip design and data center infrastructure, is expected to significantly boost future revenue and earnings as demand for AI technology and infrastructure grows.
  
• The Stargate project, aiming to deploy a massive $500 billion in AI infrastructure, alongside strategic partnerships with technology leaders like OpenAI, NVIDIA, and Microsoft, is anticipated to enhance SoftBank's long-term revenue streams and profit margins by establishing a strong presence in the AI ecosystem.
  
• The development and commercialization of Cristal intelligence, which integrates AI into enterprise systems, could significantly increase SoftBank's future revenue and earnings through new service offerings and expansion into the enterprise AI market.
  
• SoftBank's strategy to increase its equity and debt financing capabilities through project financing for Stargate could improve net margins by leveraging external funds while minimizing its own capital expenditure, enhancing returns on investment.
  
• The potential for IPOs from key portfolio companies, such as those held by the Vision Fund, including candidates like Klarna and PayPay, along with increased valuations of companies like OpenAI, is expected to contribute to higher NAV, improve financial stability, and boost earnings in the future.

SoftBank Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SoftBank Group's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.0% today to 4.2% in 3 years time.
• Analysts expect earnings to reach ¥337.3 billion (and earnings per share of ¥237.38) by about April 2028, down from ¥848.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥921.8 billion in earnings, and the most bearish expecting ¥28.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 51.3x 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 18.1x.
• Analysts expect the number of shares outstanding to decline by 1.96% 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 Group Future Earnings Per Share Growth

Risks

• The possibility of significant fluctuations in foreign exchange rates, such as the yen weakening against the dollar, can negatively impact consolidated net income despite potentially positive effects on net asset value. This could lead to earnings volatility.
  
• Losses from investments, especially in key holdings like Alibaba, illustrate potential vulnerabilities due to depressed share prices and negative investment returns. Such factors could impact overall revenue and profitability.
  
• The Stargate project finance strategy presents execution risk, as project financing, subject to market conditions, may impact capital availability and necessitate slower project progress if financing is challenging. This could affect future earnings potential and cash flow.
  
• Operating expenses related to new initiatives like Cristal intelligence will initially be expensed, affecting net margins until commercial viability and profitability are established. This may pressure near-term financial performance.
  
• Investment losses from Vision Fund portfolio companies, influenced by political and market conditions, highlight risks of decreased fair valuations and potential financial setbacks, impacting overall earnings and growth potential.

Valuation

• The analysts have a consensus price target of ¥11161.6 for SoftBank Group 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 ¥15200.0, and the most bearish reporting a price target of just ¥8000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥8076.7 billion, earnings will come to ¥337.3 billion, and it would be trading on a PE ratio of 51.3x, assuming you use a discount rate of 4.6%.
• Given the current share price of ¥6738.0, the analyst price target of ¥11161.6 is 39.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.