Arm And OpenAI Hype Will Fade Under Regulatory Clampdown

Key Takeaways

• Over-optimism in AI-related and technology IPOs could lead to disappointments if market sentiment or valuations decline, affecting income and asset growth.
  
• High portfolio valuations and leverage heighten risks if regulations tighten or funding costs rise, potentially constraining exits, profitability, and cash flow.
  
• Strategic focus on AI, successful asset monetization, and disciplined financial management position SoftBank for long-term growth, stronger earnings, and enhanced shareholder value.

Catalysts

Provides telecommunication services in Japan and internationally.

• Investors may be overly optimistic about near-term monetization of AI-driven assets (e.g., Arm, OpenAI, PayPay IPOs) due to current digital transformation and AI enthusiasm, which could lead to disappointment if public market demand or valuations for these tech IPOs soften, negatively impacting future net income and NAV growth.
  
• Expectations for persistent, rapid value creation from SoftBank's portfolio may not fully factor in the risk that stricter global regulations, particularly in technology and cross-border investments, could limit portfolio company exit opportunities and dampen revenue and realized gains.
  
• The prevailing narrative centers on AI adoption as an unstoppable growth engine across industries, but high valuations now may ignore the risk that normalization of interest rates and tighter funding could compress multiples for high-growth, capital-intensive private tech ventures-leading to lower Vision Fund investment returns and potential write-downs, reducing net margins and earnings stability.
  
• There is significant optimism priced in around Arm's projected royalty revenue growth as AI and cloud infrastructure scale, but margin pressure from ongoing high R&D investment and potential delays in mass adoption of new architectures could constrain short-to-mid-term profitability and operating income.
  
• Investor enthusiasm for SoftBank's capital recycling and disciplined approach may overlook past capital allocation missteps and ongoing high leverage; this raises the risk that in a more challenging macro or regulatory environment, balance sheet pressures could increase, impacting cash flows, net margins, and future buyback or dividend capacity.

SoftBank Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SoftBank Group's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.5% today to 7.2% in 3 years time.
• Analysts expect earnings to reach ¥620.6 billion (and earnings per share of ¥433.31) by about September 2028, down from ¥1731.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥1250.7 billion in earnings, and the most bearish expecting ¥107.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.5x on those 2028 earnings, up from 12.0x today. This future PE is greater than the current PE for the JP Wireless Telecom industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 1.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.93%, as per the Simply Wall St company report.

SoftBank Group Future Earnings Per Share Growth

Risks

• SoftBank's close alignment with long-term AI secular growth-demonstrated by investments in Arm, OpenAI, and numerous AI-focused Vision Fund portfolio companies-could drive significant gains in NAV and future earnings as AI adoption and automation accelerate globally.
  
• Ongoing monetization of late-stage and public portfolio companies (e.g., PayPay, Coupang, Chime, eToro, Klarna, Lenskart) via IPOs and strategic exits could unlock substantial realized gains, strengthening SoftBank's revenue, cash flows, and book value.
  
• Arm's robust royalty revenue growth (up 25% YoY), expanding market share in cloud/data center chips, and increasing integration into hyperscaler infrastructure point to long-term, high-margin revenue tailwinds and improved net margins as Arm solidifies its role in the AI era.
  
• Efficient capital recycling, sustained improvements in loan-to-value ratios, significant cash reserves, and active asset divestment strategies (e.g., monetization of T-Mobile and Deutsche Telekom stakes) are supporting financial flexibility and balance sheet strength-reducing risk and potentially supporting future investment returns and earnings stability.
  
• Positive sentiment from narrowing NAV discount (from 57% to ~40%) and evidence of ongoing buybacks and the intention to balance shareholder returns, new investments, and debt reduction may gradually result in market cap catching up to intrinsic value, benefiting SoftBank's share price in the long run.

Valuation

• The analysts have a consensus price target of ¥14420.176 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 ¥20000.0, and the most bearish reporting a price target of just ¥9400.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥8650.2 billion, earnings will come to ¥620.6 billion, and it would be trading on a PE ratio of 36.5x, assuming you use a discount rate of 4.9%.
• Given the current share price of ¥14570.0, the analyst price target of ¥14420.18 is 1.0% lower. 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.