Softbank Group Stock: On the Verge of Retreat (OTCMKTS: SFTBF)

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The following segment is taken from this fund letter.


Softbank Group Holdings (OTCPK: SFTBY).

Last week, we initiated a new short position in Softbank Group Holdings (OTCPK:SFTBY). Softbank’s last hope for liquidity is an IPO of Arm Holdings, a semiconductor design and licensing company. Unfortunately for Softbank, which weathers the tech meltdown with a true loan-to-value ratio of nearly 60%, the inventory correction building in the semiconductor industry could be one for the history books. .

The chip order panic in 2021 and the first half of this year has created a large excess of chip inventory in almost every channel. The most constrained channel, the automotive supply chain, has fully caught up, and reports of dual chip orders are starting to trickle down. Inventory channels, measured in days, are about 50% above their peak before the last chip patch of 2018, and are more than double levels from two decades ago. At the same time, underlying demand is woefully weak, with PC shipments accelerating on the downside recently.

So while we believe in the digital revolution, like almost every other human being, the inventory correction and loss of pricing power that commodity chipmakers are likely to experience could be particularly brutal.

All of these companies are in the final stages of experiencing the bull-whip effect. Due to various impacts of Covid-19, whether it’s slowing initial customer demand or slowing manufacturing due to labor or parts shortages, many industries have found themselves “underserved”. supplied”. Eventually, when demand picks up, the reverse happens, with companies quickly ordering more goods, often too much, and due to a global economy that is much more dependent on just-in-time supply chains, there has had cascading effects on the supply chain and shortages leading to price increases.

The extreme upward moves have led to excessive behaviors that will result in a major rollback effect, which is most evident today in the retail and apparel sectors, where companies are suddenly flooded with excess inventory and will need high promotions to move products.

We are generally in a phase of high inventory-to-sales ratios, decongested supply chains and cooling consumer demand, which should lead to lower prices for “basic” goods, even if food prices and energy remain high. While macro-economic indicators like consumer price inflation are difficult, if not impossible, to predict, taking one industry at a time is a much different process. Each of our shorts are in an “inventory correction” phase and should lead to lower prices and margins. We don’t have an opinion on the direction of the CPI, nor on the Fed’s reaction to the upcoming inflation release, the two million dollar questions of the day.

But if we look at semiconductor inventories or the container ship order book, anticipating supply/demand imbalances is a bit easier at the micro level. Industry insiders think “this time is different” and in fact, the CEO of Taiwan Semiconductor (TSM) actually used those exact words when talking about its capacity expansion in the environment current. So while stocks have started their descent, the destocking hasn’t even started yet, and we believe the decline is likely to be particularly steep, with most industry insiders still bullish on the mildness of the correction. .

These shorts help us maintain our neutral stance on the tech sector, even though we exited our ARKK put options. Using Sir John Templeton’s rule of thumb for the emotional evolution of investment cycles, we believe we are nowhere near the level of “desperation” required to start acting aggressively here. Companies like HPQ and Softbank are still supporting their stock prices with fairly aggressive buybacks. Although we spend a lot more time looking at desires in this space, it feels like time is on our side here.

On the other hand, time is running out for Masa, CEO of Softbank, whose considerable personal influence leads the company to report dishonest debt levels at Softbank. Not only are the debt levels quadruple what Softbank claims they are, but the private portfolio of Vision funds is not actually tied to private market transactions. The company recently touted how Vision Fund I’s private portfolio is still in the black, using its discounted cash flow and relative valuation methods.

Yet simply marking this portfolio at current secondary trading levels reveals that the company has overstated the values ​​for this segment of the portfolio by 25%. And that’s on high profile and big holdings like ByteDance (BDNCE). Vision Fund II is filled with lower quality and less liquid positions. The idea that these positions have only fallen by 20% this year is difficult to invent. Yet that is the story Softbank is telling. So, not only is the leverage not correct at Softbank, ringing today at an LTV of 59%, but the assets are not adapted to the current reality.

Clearly, the first stage of the tech downturn has been in unprofitable disruptive tech companies. It has largely run its course. But we think the next step will be in private markets. With no additional cash to support its businesses in subsequent rounds, Softbank’s holdings look particularly vulnerable. A good example of this is Vision Fund II holding Klarna (KLAR), which recently had to settle its funding without the traditionally exuberant participation of Softbank. Recent follow-up funding was 85% less than its previous round.

In conclusion, we believe that the lag that private markets are experiencing relative to public markets, combined with a particularly misplaced collection of leveraged private tech assets, could result in an even worse downside for Softbank than the 2000 correction.


Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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