SoftBank Offers a Hard Bargain

Want to invest in Yahoo/Yahoo Japan, Sprint Corp., ARM Holdings, E*Trade, Uber, and Alibaba, among others? Want to simultaneously gain a bit of exposure to the Yen? How about including ownership in a large venture capital investment arm with stakes in artificial intelligence, the internet of things, robotics, mobile apps + computing, major communications infrastructure, cloud technologies, financial technologies, consumer internet, and (everyone’s favorite) computational biology? Along the way you’ll also own things like a professional baseball team (go Hawks!) and the major internet provider in New Zealand, of all places… What if I also told you this investment has outperformed the venerable Berkshire Hathaway over the past 5 years and has a track record dating back to 1981 that makes it one of the largest companies in Japan alongside the likes of Nissan, Toyota, and Mitsubishi?

Ladies and Gentlemen, I give you SoftBank

Wait, A Single Stock?

I am well on record as being a proponent of passive index fund investing. For most everyone this is the best way to fly. It’s simple, cheap, easy to understand, and can made to be automatic with auto-drafted monthly contributions / dollar cost averaging. But hot dang – I love holding companies that combine the assets of several businesses under one roof.

What Is A Holding Company?

InvestopediaA holding company is a parent corporation that owns enough voting stock in another company to control its policies and management. A holding company exists for the sole purpose of controlling another company (or companies) rather than for the purpose of producing its own goods or services. 

What Are We Holding?

Warren Buffet’s Berkshire Hathaway is by far the most famous (and successful) of holding companies, and it’s one of my favorite long time investments. A holding company like BRK.A/B offers instant diversification among dozens of companies, with a manager/leadership group driving the investment strategy.

Holding companies can also gain you exposure into “private equity” investments since a holding company may be investing in a company that we cannot invest in ourselves if they are not publicly traded. For instance, if you love Uber and want to invest in Uber you cannot go buy stock in Uber via your E*TRADE account. Instead you have to have the mega-deep pockets to invest in Uber privately – or you can gain exposure via a publicly traded holding company that has invested in Uber by way of the private equities / venture capital funding market.

When you buy a share of BRK.B (or BRK.A if you’ve been living right) you are actually buying around 60 companies wholly owned by Berkshire Hathaway (with 100% ownership or close to it). We’re talking anything from (my favorite) The Pampered Chef to GEICO (Warren, can we please cut the GEICO advertising budget by at least 33% – thanks!). With BRK.B you’ll also own a portion of about 40 companies where Berkshire owns smaller percentages (roughly 1 to 30% ownership depending on the company). This includes companies as diverse as Apple Inc. to Wells Fargo. You can see a full list here and here.

What’s In SoftBank?

Like Berkshire, SoftBank owns a lot of companies. A lot. I listed a few of the majors above and a full list can be seen here. I simply love the make-up of SoftBank and the diversification of its assets. This is a holding company with a market cap nearing $100 billion predominately centered in on the internet & telecommunications industry. This makes them a perfect companion piece to Warren Buffet’s investments that are famously not known to be focused in the tech arena at all.

Berkshire as a whole is valued at almost 5 times the size in terms of market cap, so I think of SoftBank as a little brother involved in different though equally profitable industries, but mimicking his older brother’s success.

In the past five years SoftBank has skyrocketed above his older brother. Note the volatility…

The CEO of the SoftBank Vision Fund, Rajeev Misra, has recently commented; “We are the Berkshire Hathaway of technology. But unlike them, we are global. We are the biggest foreign investor in Europe, in India and China.”

Similarly, SoftBank’s CEO Masayoshi Son has made comments about adopting various Buffet/Berkshire models throughout his company, especially in matters of how the company deals with the debt of its individual holdings in order to keep debt off the books of SoftBank’s balance sheet.

This Vision Fund…

One aspect of SoftBank I find most exciting is their newly launched Vision Fund – A $100 Billion technology fund that will focus on investing in emerging technologies. Over the summer, the fund announced its first investments of over $93 Billion in committed capital by outside investors – that’s $93 billion of a $100 billion goal raised on their first offering!

So who is investing in SoftBank Vision Fund? So far we have the following lightweights: the Public Investment Fund of the Kingdom of Saudi Arabia ($45 billion), the Mubadala Investment Company of the United Arab Emirates ($15 billion), Apple Inc. ($1 billion), Foxconn Technology Group ($1 billion), Qualcomm Incorporated ($1 billion), Sharp Corporation ($1 billion), and Larry Ellison of Oracle (personally in for $1 billion). SoftBank itself has $28 billion committed to the fund. There is a wonderful TechCrunch article written about the Vision Fund here. For more information on this aspect of their business, please read their May 22, 2017 press release here.

I see the Vision Fund as a major boon for SoftBank and its investors, a source of income, a source of debt relief, and a great potential for a major spike in capital appreciation.

How To Buy

So how does one buy SoftBank stock? The company trades on the OTC (over the counter) market as 2 different ADRs (American Depository Receipts): SFTBF is the equivalent of the TSE (Tokyo Stock Exchange) traded shares while SFTBY is equivalent to 1/2 of the Softbank shares: 1 SFTBF = 2 SFTBY shares. Neither ADR does a great job of tracking the value of SoftBank on the Japanese stock exchange where it trades under the symbol TYO:9984. The reasoning for this is most likely dollar fluctuations against the Yen, so for this reason I would recommend you buy the stock on the Tokyo exchange if at all possible.

To do this you’ll need 3 things – One, a global trading account. Two, some Yen. And three, the pockets to buy 100 shares at a time since the company only trades in round lots in Tokyo. The stock will cost you $88.1117USD/share as I write this. Your global trading account will allow you to do the USD -> Yen conversion, though be warned that can take 2 or 3 days to settle before you can buy the SoftBank shares, so the price may move a bit as you wait. There will also be fees far and above the fees incurred when trading on a US exchange – beware. If this is not your thing, buy the ADR instead.

Research

As with any holding company you will have to look at SoftBank as a “sum of all the parts” evaluation. In order to keep this blog post as a high-level overview, I am not going to get into technical financial evaluations and metrics, but I have reason to believe the sum of all parts under SoftBank’s holdings is 30-35% higher than its share price dictates.

The addition of their “Vision Fund” coming online offers even greater upside with SoftBank holding approximately 25% or more of the fund and also collecting a management fee on its $100 billion. It’s also worth noting the stock pays a .45% yearly dividend.

One considerable risk to consider is the company is currently highly leveraged with a large debt load, so that is worth a closer look. The company has acknowledged the large debt load and recently outlined steps to decrease the leverage. Before you decide to buy the stock, I would encourage you to do your own due diligence with a much closer inspection of their financials, annual reports, and past earnings.

How Much?

Place SoftBank in your large-cap allocation (which should be about 40% of your total portfolio) and invest 3 to 5% of your total portfolio allocation in the stock. I currently have around 5% of my total allocation in SoftBank and a little over 10% of my total allocation in BRK.B within my large-cap allocation that includes RSP as my core large-cap investment.

As always, your risk tolerance and investing goals will dictate your allocation strategy. Please see the disclaimer below, read up on SoftBank, and let me know what you think. Cheers, and…

Go Hawks!

disclaimers – I am long TYO:9984, BRK.B, and RSP. Furthermore I am long AAPL and employed by the company. My views on SoftBank are my own and do not attempt to represent the views of my employer in any way. I merely mention Apple since they are an investor in the SoftBank Vision Fund and an investment held by BRK.B. This should not be considered an endorsement to buy Apple stock.
As with any investment you should do your own due diligence and consult the services of a reputable fee-based advisor before you invest your hard earned money in anything. Lastly, investing on a foreign stock exchange will carry risks not inherent to investing in the US – fees, currency fluctuations, financial reporting requirements, volatility, and liquidity all factor in as different risk variables that should be considered. And amen.

 

 

 

 

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