Where Will SoftBank Invest Its Nvidia Proceeds?

Are we seeing signs that the investment bubble in Artificial Intelligence (AI) may be about to burst?

SoftBank Group (SFTBY) (T:9984) is grabbing the headlines Tuesday, not so much for its earnings, released after the closing bell in Tokyo, but because the company disclosed that it had in October sold all of its stock holding in Nvidia NVDA, to the tune of US$5.8 billion.

The catch? SoftBank is investing the proceeds … in AI!

Most Exciting Company in Japan?

I’ve long said that SoftBank Group is the most-exciting company in Japan. It’s morphed from a staid software reseller and telco into a tech-focused venture-capital fund.

Yet it appeared to have lost its way. Founder Masayoshi Son in August 2023 admitted that he had begun to doubt himself. “There were times when I felt so empty,” he told shareholders at the company’s annual meeting, after the Vision Fund he launched posted a whopping ¥4.3 trillion (US$30.1 billion at the time) loss for the fiscal year.

It was a fascinating admission and insight into the mind of the SoftBank entrepreneur, born near Fukuoka to parents of Korean descent. Son was briefly the richest person in the world after early investments into both Yahoo! and Alibaba Group Holding  (BABA)  (HK:9988). But by 2023, he’d sold almost all the BABA holding, and wasn’t sure where he’d turn next.

A series of investments into shared-office landlord WeWork, the Chinese ride-hailing app Didi Chuxing  (DIDIY) , the Singapore superapp operator Grab Holdings, and Korean e-commerce operator Coupang CPNG ran aground.

Son 'Couldn’t Stop Crying for Days'

Son, now 68, figured he might done. He asked himself how long he had left. “Is this enough? Is this it?” he recalls asking himself. “I cried and cried and couldn’t stop crying for days.”

He has found new purpose with AI, where he says he wants to be “an architect to build the future of humankind.” At his age, he admits he surely won’t see the AI revolution out. “I may not achieve everything — I may as an individual not be enough — but I want to play a role,” he admitted.

And he said, after years of playing defense to shield his investment portfolio from losses, that it was time to “shift to offense mode.”

The U$5.83 billion war chest from the Nvidia share sale will now fund that offensive.

Stacking the AI War Chest

It’s part of an overall attempt by SoftBank to monetize existing assets. The Nvidia sale is actually smaller than the US$9.2 billion it has raised through the sale of shares in T-Mobile  (TMUS) , with another US$2.4 billion coming from share-sales and derivatives based on its holding in Deutsche Telekom (DTEGY) (DE:DTE).

SoftBank has also this month boosted the size of its margin loan against its holdings in the British chip designer Arm Holdings  (ARM)  to US$20 billion, from US$13.5 billion. Half of the new total remains undrawn for now.

That’s quite the war chest! Where will Son and SoftBank place the money?

Some readers may be aware of a 2000 study — which I covered when I was working at CNN at the time — indicating that investors who trade frequently underperform the market.

The paper, which you can find here, is called Trading is Hazardous to Your Wealth, from the behavioral-finance professors Brad M. Barber and Terrance Odean. They conclude that investor overconfidence leads to greater trading volume, and diminished investor returns, mainly in the form of transaction costs.

They looked at 66,465 households who had accounts at a major discount brokerage, over the course of six years. Due to trading costs, the net returns of the households underperformed a simple market average (like you’d get from an ETF) by 31 basis points per month, or 3.7% per year. The top 20% households in trading volume underperform by 5.5% per year.

Artificial Super Intelligence, Whatever That Is

So while SoftBank is selling out of a winner with Nvidia, where it puts the money next will be key. Will it opt for the AI equivalent of WeWork?!

Son wants to focus on what he calls “Artificial Super Intelligence,” or ASI.

I’m not completely clear on what that is. Son has said that he defines it as AI that can exceed human capabilities by a factor of 10,000 — although he envisages humans controlling the “ASI brain” and “robot body” to “create happiness.”

SoftBank aims to become the “No. 1 ASI platform provider” over the course of the next 10 years.

Can’t Tell If It’s an AI bubble

This actually isn’t the first time SoftBank has sold out of Nvidia. It did the same in 2019 before starting to resume small stake purchases the following year.

SoftBank execs dodged the question about overvaluations in AI, but were quick to explain that the NVDA sale has nothing to do with the merits of the company itself.

“I can’t say if we’re in an AI bubble or not,” SoftBank CFO Yoshimitsu Goto said on Tuesday’s conference call. The Nvidia share sale is occurring only “so that the capital can be utilized for our financing,” he added.

SoftBank already has a stake in OpenAI that it notes has risen in value by US$14.6 billion, pushing SoftBank’s net asset value to ¥33.3 trillion. It led a March funding round of up to US$40 billion at a valuation of US$300 billion, then reportedly last month led a consortium buying US$6.6 billion in OpenAI shares at a higher valuation of US$500 billion.

The strong rally in AI-related values has driven up SoftBank earnings. The gain in its OpenAI holding helped contribute to a gain in its OpenAI holding to a ¥2.5 trillion (US$16.6 billion) profit for these second-quarter results. Analysts expected ¥418 billion in earnings.

Shares Setting Records

SoftBank shares have responded, up 145.8% this year alone. They hit an all-time high at ¥27,695 on October 29, setting a closing high of ¥27,315 in the process.

But losses continue to mount at OpenAI, according to Reuters, even as it prepares for an initial public offering that could value it as high as US$1 trillion.

“SoftBank’s position is that the risk of not investing is far greater than the risk of investing,” Goto said at the Tokyo briefing.

Besides OpenAI, SoftBank already has holdings in Perplexity AI, the TikTok parent ByteDance, and the U.S. chip designer Ampere Computing. It is also buying ABB’s robotics arm.

Has Son rediscovered his magic touch? SoftBank shares will continue to find new record highs so long as the AI investment boom continues. If it bursts? Well, he and we might be crying for years!

At the time of publication, McMillan had a small position in NVDA.