Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 17th November 2022

Masayoshi Son (pictured) is a Japanese investor who created Softbank in the 1980s (now with version 2) through which he now wants to mimic a “virtual Silicon Valley”, meaning a platform on which unicorns (start-ups that turn out to become billion-dollar marvels) can offer each other contacts and advice, buy goods and services from each other, and even join forces.

The child of second-generation Korean immigrants, Son grew up in relatively humble circumstances. His childhood home was built on land that belonged to the Japan National Railways, contributing to a sense of instability throughout his early life. Son’s father supported the family by raising pigs and chickens. He also showed a willingness to take risks that his family would inherit, starting an illegal sake brewing business. It paid off, allowing the Sons to buy a car, the first in their neighbourhood.

Son is known for his unconventional and often sanguine presentations at earnings announcements, where he highlights the thinking behind sometimes controversial decisions, such as investing generously in risky ventures like the troubled WeWork. He told CNBC that people should brace themselves for the proliferation of artificial intelligence as it will change the way we live within two decades.

Son has grand visions of what technological advancements the future holds.  SoftBank’s subsidiaries are pushing the frontiers of technology in areas such as the “Internet of Things”, artificial intelligence and deep learning.  For this purpose, the Vision Fund is aggressively competing with traditional technology investors in Silicon Valley in a no-holds-barred fight for talent.

SoftBank has surged, reaching the highest close since the company went public in 1994, and flying past a long-standing record two decades ago, as a boom in tech companies helped lift SoftBank’s portfolio.  Son believes he has a unique ability to predict future technology trends, and gallantly states he is ready for the gamble.

Readers are aware that when it comes to the use of artificial intelligence in powering complex robotics, these reduce cost of manufacturing.  One may ask, who is funding such expensive research?  The answer is a cohort of venture capitalists who are constantly poised to look out for talented persons in their ongoing recruiting outreach.  It isn’t uncommon for research firms to seek top notch university graduates who show leadership potential.

SoftBank as an organisation is synonymous with its charismatic founder that is reshaping global tech with its colossal treasure box. The latest news is that Japan’s SoftBank Group posted a net profit in the second quarter, partly thanks to gains from the recent reduction of its stake in Chinese e-commerce giant Alibaba.  The investment behemoth has made huge bets to fund and grow new tech companies around the world – making its earnings vulnerable to fickle market forces.

SoftBank’s results have lurched between dizzying highs and lows in recent years, while China’s crackdown on its tech sector has also taken a toll on the company.  Commenting on the recent drama surrounding crisis-hit cryptocurrency platform FTX.com, he reassured listeners that SoftBank’s investment in these virtual currencies and crypto assets is extremely small.  Recently, FTX Group announced that it filed for Chapter 11 bankruptcy proceedings, adding it has begun an “orderly process to review and monetize assets for the benefit of all global stakeholders”.

In August, the SoftBank group announced it would sell some of its shares in Alibaba, reducing its stake in the Chinese tech giant to around 15 per cent from 24 per cent.  This helped boost SoftBank’s earnings in the second quarter for a net profit of €21.2 billion.  SoftBank’s performance in the April-to-June quarter was dragged down by a global tech share rout, triggered by interest-rate hikes by the US Federal Reserve and other central banks to tackle inflation.

In September, SoftBank confirmed that 30 per cent of its investment advisors would lose their jobs.  The company also sold off its entire stake in ride-sharing company Uber, garnering a $1.7 billion profit from its original 2018 investment in the company from these sales.  The news came as SoftBank announced the removal of several high-profile executives from its board, following investor pressure to improve governance.

At the end of September, SoftBank held positions worth $16.8 billion in stocks including Amazon.com Inc, Google parent Alphabet Inc and Facebook Inc.  The fair value of SoftBank’s options and futures positions was $2.7 billion at the end of September.  It booked a record gain in the quarter from investments via its two Vision Funds, though much of that typically reflected unrealised profit from portfolio companies.  The figure compared with a loss a year earlier.  The first fund is now worth some $76.4 billion.

That total does not include gains over the life of the fund including a $4.5 billion gain from exited investments and a $1.5 billion gain from derivatives.  It is notable that layoffs arose from major high-tech companies, like digital mortgage originator Better, delivery app GoPuff, online real estate brokerage Redfin, and fitness tech startup Tonal.

However, what’s most important is that we are seeing layoffs ultimately spread across US tech and into other sectors, boosted by hiring among retailers and the travel sector ahead of the year-end holidays, private employers created 239,000 jobs in October, according to the US National Employment Report.

In a statement, ADP chief economist Nela Richardson said that although the figure shows the labour market remains “really strong”, hiring was not broad-based, with manufacturing firms, which are heavily sensitive to interest rates, losing 20,000 jobs in third quarter.  Moving on we now witness most of America’s biggest technology firms are having a bad time.

More than $1trn has been wiped from their market value in recent weeks.  Is the mammoth sell-off nothing more than investor jitters?  Or is it a symptom of something more fundamental about the future of the tech sector?

Simply one may mention Uber, the Netflix group, Meta, Amazon, and others.  Others ask what they can learn from China, where tech behemoth Alibaba has seen its share price plunge by 77% from a 2020 peak.

And if this is a turning point, what does that mean for the global future of the formerly most profitable tech sector in America? Only time will tell if there is a twist of faith in high technology.

Author: George Mangion - Senior Partner PKF Malta
Published on Business Today: 17th November 2022
Get in touch: info@pkfmalta.com