Lately, there has been a rapid-fire release of inferences, insinuations, and refutations related to both Chinese e-commerce and cloud behemoth Alibaba (BABA) and its most long-standing benefactor in the Japanese giant Softbank (SFTBY). The chaotic news cycle swing has led to an equally wild swing in the share price of both firms in the past week.
For Alibaba, this meant dropping over 6% to start the week only to rebound by about the same measure into the mid-week. Meanwhile, Softbank shares see-sawed throughout the week, popping notably in Wednesday's trading session only to recede again into Thursday's early morning hours after an inflation print pummeled tech stocks.
While the rumors about a major sale of Alibaba shares by Softbank that sparked the wild swings have been denied by Softbank, the underlying factors that made them credulous remain crucial for investors to observe.
Reading the Tea Leaves
It is important to begin where the see-saw action started. The immediate cause of turmoil to begin the week was speculation from Citi that SoftBank could be preparing to sell a chunk of its sizable stake in the company.
For reference, Citi estimates that SoftBank currently owns 5.39 billion shares in Alibaba. Citi surmised that a sale could be in order after an SEC filing from Alibaba that the firm is registering an extra 1 billion American Depositary Shares, the presumption being that this would allow Softbank more flexibility to offload shares.
As this speculation circulated far and wide, Softbank and Alibaba shares shot in opposite directions, with the Chinese company's stock receiving the short end of the stick.
However, this suspicion was summarily shot down by both Softbank PR in a press release only days later. Soon after, this was seconded by the head honcho of the firm himself, Masayoshi Son.
"[The registration] was not a request by SoftBank.," Son told analysts on Thursday morning in Japan. "We were surprised. It was done by Alibaba."
Shares of Alibaba quickly recovered on Wednesday and Thursday as the rumors were quashed and reports surfaced suggesting Chinese state-backed investment funds were eagerly scooping up shares of struggling, U.S.-listed stocks like Alibaba. Still, the rationale for the share registration remains an open question.
Broader Implications
There are still more open questions, though, namely the trajectory of both Alibaba and Softbank as tech valuations continue to tumble.
In the past year, both Softbank and Alibaba have seen their share prices halved. For Softbank, this has been led by losses in many of its tech-focused investments such as those contained within the Vision Fund and high-profile problems with stakes in Chinese firms battered by regulation like the currently-delisting DiDi Chuxing (DIDI) .
Of course, some of the concerns that plagued DiDi also apply to Alibaba, to the point that the shares saw their lowest close in nearly five years at its December nadir. These overhangs, despite the apparent buy-in of state-backed funds, do not appear to be dissipating soon either. The trend in Alibaba, obviously, has also dragged down Softbank, helping cut the net asset value of its portfolio, which dropped by more than 10% in the final quarter of 2021.
That is not to mention the increasing uncertainty that surrounds Softbank's prized semiconductor investment in the U.K.-based Arm Holdings.
On Monday, Nvidia (NVDA) and Softbank jointly announced the termination of an agreement to sell the chip design leader. Both press releases cited significant regulatory hurdles that rendered the deal unlikely to reach approval.
"Arm is becoming a center of innovation not only in the mobile phone revolution, but also in cloud computing, automotive, the Internet of Things and the metaverse, and has entered its second growth phase," Masa Son said upon the termination. "We will take this opportunity and start preparing to take Arm public, and to make even further progress."
On the point that Arm is central to the semiconductor industry and innovation in the highest growth sectors of technology, Masa is almost undoubtedly correct. In fact, it is Arm's market dominance that likely scuttled the deal with Nvidia in the first place. After all, SoftBank itself has said it expects a 90% market share in mobile application processor, IoT application processors, and in-vehicle services by 2028.
However, reaching this point in an industry as hotly competitive as semiconductors requires significant investment.
"I think Risc-V's popularity probably increased during the Arm negotiations, " Bernstein analyst Stacy Rasgon wrote in a recent research note on the deal's collapse. "Nvidia was going to invest a lot of additional resources, which Arm will now have to do alone."
Of course, as the centerpiece of Softbank's sprawling tech empire, this will necessitate significant spend by Softbank itself ahead of a slated March 2023 IPO to sustain the firm's ballooning sales. Also of concern, the planned IPO does not necessarily guarantee the same windfall that the Nvidia deal did.
"In an IPO process, it's going to be tricky. This is still a company which has actually lost money in the last three, four years," Jefferies analyst Atul Goyal told Bloomberg earlier this week. "In the current market situation, trying to get a decent valuation for such assets would be tricky."
As inflation runs hot and hits tech stocks hard that prophecy may yet prove prescient. Additionally, the March 2023 IPO date also offers time for the current shortage elevating semi stock valuations to be sorted out.
Considering Masa Son purchased Arm for a hefty $32 billion in 2016, a valuation that falls much below the slated $40 billion price tag agreed to by Nvidia may mean another prized investment will barely break even. If this scenario does play out, more sales might be on the table for the Japanese investment giant.
Coming to Conclusions
In the end, the uncertainty surrounding both the regulatory issues confronting Chinese companies such as Alibaba and companies highly reliant upon them, such as Softbank, make the risk-reward equation challenging for even the most optimistic investors. Once the market's general turn against high-flying tech stocks is accounted for, this equation becomes only more lopsided.
To be sure, Masa Son is rightly regarded as one of the most visionary investors of his generation. As such, his extremely aggressive investments may well pay off in the long term. Still, wary investors may wish for more clarity on this trajectory before betting the farm on that prospect.
