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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Key Takeaways:
- SoftBank’s audacious “all-in” AI investment strategy, once a powerful catalyst for growth, is now amplifying risks amidst a global market correction, tightening credit conditions, and escalating geopolitical tensions, leading to a steep 60% decline in its share price since June.
- The conglomerate’s major portfolio companies and anticipated public listings, including chip designer Arm and energy infrastructure firm SB Energy, confront significant valuation headwinds and execution delays, reflecting a broader market shift from speculative growth to a demand for proven profitability and cash flow.
- SoftBank’s rising financial leverage, characterized by an increasing loan-to-value ratio and spiking credit default swaps, underscores a growing investor skepticism and a potential constraint on its ambitious M&A pipeline, challenging its ability to secure further large-scale funding in a more risk-averse environment.
SoftBank founder Masayoshi Son’s colossal, concentrated bet on artificial intelligence, once the engine that sent shares in the Japanese conglomerate soaring to dizzying heights, has now brought the stock crashing back to earth with a resounding thud. The company’s shares have plummeted approximately 60 per cent since June, a decline that reflects not only company-specific challenges but also a broader market recalibration away from speculative growth assets towards more defensive plays.
The immediate catalyst for this precipitous drop includes a confluence of factors, notably the Democrats’ recent decisive victory in the US midterm elections. This outcome has sharpened focus on potential political and regulatory risks surrounding vast AI infrastructure developments, particularly in key regions like Texas, where SoftBank is planning some of its most ambitious data centre projects. Concerns range from increased scrutiny over energy consumption and environmental impact to potential changes in local incentives and federal technology policy, all of which introduce a layer of uncertainty for capital-intensive ventures.
While this heightened uncertainty casts a pall over the wider AI industry, SoftBank, which is due to report its half-year earnings on Tuesday, is uniquely vulnerable. Son’s “all-in” strategy, epitomized by its singular focus on the AI ecosystem, propelled the shares to record highs during the prolonged period of easy money and exuberant tech sentiment. However, this very concentration now magnifies the adverse impact as global economic sentiment has turned sharply bearish, with investors prioritizing profitability and resilience over sheer growth potential.
The erosion of value is visible across SoftBank’s major holdings, with its crown jewel, UK chip designer Arm, experiencing a parallel and equally sharp decline of about 60 per cent since June. This mirrors the broader semiconductor sector’s struggles, impacted by inventory corrections, slowing global demand for consumer electronics, and persistent geopolitical tensions affecting supply chains and trade dynamics.
“With SoftBank, it’s all higher risk, higher reward, but the risk profile has fundamentally shifted,” observed David Dai, an analyst at Bernstein. “You could argue that in the past, SoftBank was a more diversified investment company, but now virtually all its investments are centred around the same ecosystem of AI – from foundational chips to energy infrastructure and applications. There is nothing truly defensive in there that can cushion the blow of a downturn in this specific sector or a broader market retreat from high-multiple tech.”
Among its most exposed businesses is SB Energy, SoftBank’s US energy infrastructure company, whose eagerly anticipated listing at a projected $50bn valuation now risks being indefinitely put on hold, according to sources familiar with the ongoing discussions. The current market environment, characterized by rising interest rates and a flight to safety, has severely dampened investor appetite for large, capital-intensive IPOs, particularly those without immediate, robust profitability.
“What’s just happened in the US market, combined with global economic headwinds, may mean testing how long SB Energy can go without going public, potentially forcing SoftBank to explore alternative funding mechanisms or extend its internal capital commitment,” stated one of the individuals close to the matter.
Analysts underscore that newer AI infrastructure companies, such as SB Energy, are particularly vulnerable to tighter financing conditions. While established technology giants like Meta and Google possess the substantial cash reserves and access to cheaper credit to self-fund their expansive AI infrastructure requirements, nascent companies heavily dependent on external equity or debt financing face considerably greater difficulties in this capital-constrained environment. Valuations are being scrutinized much more closely, and the path to profitability is paramount.
Any significant delay to SB Energy’s IPO has wider strategic consequences for the group. The successful progress of this listing is crucial to SoftBank’s broader plan to eventually list Roze, an AI and robotics play that Son intends to leverage in data centre development, effectively using SB Energy’s success as a proving ground for Roze’s worth and scalability.
Son has also found himself caught squarely in the crosshairs of escalating geopolitical tensions with Beijing, where his attempted acquisition of ABB’s robotics business has been unexpectedly blocked following a national security review. This incident highlights the increasing politicization of technology M&A, particularly in sensitive sectors like robotics and AI, amidst the ongoing US-China tech rivalry. SoftBank is currently trying to ascertain the specific concerns that led to the block and whether a viable solution can be found, such as carving out the China business from the acquisition, though such manoeuvres often complicate deal structures and valuations.
Above these immediate problems looms OpenAI, Son’s single largest and most audacious bet, to which SoftBank has committed a staggering sum of some $65bn. The generative AI pioneer and ChatGPT maker is envisioned as the ultimate end-customer for large swathes of SB Energy’s planned infrastructure and the broader AI ecosystem SoftBank is cultivating. The initial concern among investors regarding delaying OpenAI’s IPO until next year has now escalated into genuine apprehension, especially as its rival, Anthropic, actively pursues its own potentially enormous listing.
A failure by Anthropic to list at an attractive valuation, or even a modest debut, could raise serious doubts about the projected valuation and investor demand for OpenAI’s eventual IPO, directly impacting SoftBank’s unrealized gains. Despite these fears, SoftBank is still expected to participate in OpenAI’s upcoming funding round, which could reportedly value Sam Altman’s group at a staggering $1.25tn. While such a valuation could provide a much-needed boost to SoftBank’s portfolio figures, an eventual public listing remains the crucial long-term goal for crystallizing these paper gains.
The falling values of SoftBank’s core holdings, particularly Arm, have exerted significant upward pressure on its loan-to-value (LTV) ratio – a critical measure of financial leverage closely watched by creditors and investors. Analysts estimate the ratio has climbed to between 18 and 22 per cent, a notable increase from 13 per cent at the end of June. While this remains below SoftBank’s stated internal target of 25 per cent, the rapid ascent signals growing balance sheet strain. These estimates suggest SoftBank could still access another $10bn to $26bn in funding capacity before hitting its self-imposed ceiling, but the cost of that capital is undoubtedly rising.
Despite this, it’s worth noting that while some 80 per cent of SoftBank’s Arm stake may have been pledged as loan collateral, calculations based on June figures suggest only about 10 per cent of that available borrowing capacity has actually been drawn down. This offers a degree of flexibility but also highlights the double risk SoftBank faces: continued declines in asset values would quickly push up its effective leverage, while concurrently, tightening credit markets mean that any additional borrowing would come at a higher cost and potentially with more stringent terms.
Indeed, SoftBank’s five-year credit default swaps (CDS) – a market-based indicator of the perceived risk of default on its debt – have increased sharply, reflecting heightened investor anxiety. Analysts indicate that institutional investors, particularly after SoftBank’s record $11bn junk bond issuance in September, have limited appetite to continue funding Son’s ambitious ventures without clearer paths to profitability and reduced leverage, especially in the current climate of rising global interest rates.
Despite these mounting concerns and market headwinds, Masayoshi Son remains undeterred and keen to keep pushing forward with his transformative vision. He is reportedly in talks to acquire Allied Universal – a sprawling security services group he believes can be fundamentally overhauled and optimized using AI technologies. Son hopes to partly finance this deal, said to be worth close to $30bn including debt, through a new, specialized vehicle provisionally called the Transformation Fund, backed by deep-pocketed Gulf investors, signaling a potential shift in funding strategy away from traditional public markets.
And despite the recent steep share price falls, one long-term investor articulated that SoftBank’s overarching, multi-decade belief in the transformative power of AI has not wavered. “Do I think this will fundamentally change Masa’s investment process? No, as he is investing for multiple decades into the future of AI,” said David Gibson at MFT Financial. “Does it give him caution? To some degree, probably. SoftBank might take its foot off the pedal in terms of sheer pace of deployment – but it certainly won’t change the ultimate direction of its strategic focus.”
SoftBank declined to comment on the matter.
Market Impact:
SoftBank’s current predicament serves as a potent bellwether for the broader global technology investment landscape, signaling a decisive shift from the “growth at all costs” mantra that defined the past decade to a more cautious, “profitability first” approach. Its struggles will likely accelerate the ongoing valuation correction across the venture capital and private equity sectors, particularly for AI and deep-tech startups that demand substantial capital outlays without immediate revenue generation. Investors will become increasingly discerning, scrutinizing business models, unit economics, and paths to cash flow for highly speculative ventures. Furthermore, the challenges faced by SoftBank in bringing SB Energy and potentially OpenAI to market could cool down the IPO pipeline for other large-scale tech and AI infrastructure projects, leading to longer private market holding periods and potentially lower public valuations. The increased cost of SoftBank’s debt, reflected in its credit default swaps, also highlights a broader tightening of credit markets, impacting other highly leveraged investment vehicles and corporate M&A activity. Finally, the geopolitical implications, demonstrated by the blocked ABB acquisition, will force a re-evaluation of international tech investment strategies, with national security considerations playing an increasingly dominant role in cross-border deals.