A 34% rally has made SoftBank Group Corp. the best-performing stock in Japan’s Nikkei 225 Index this quarter. But if analysts are right, the tech investor’s shares may not have much upside left.
(Bloomberg) — A 34% rally has made SoftBank Group Corp. the best-performing stock in Japan’s Nikkei 225 Index this quarter. But if analysts are right, the tech investor’s shares may not have much upside left.
Shares of the firm founded by Masayoshi Son rose this week to the highest in almost a year, thanks to cost-cutting efforts and a 1 trillion yen ($6.8 billion) share buyback program. The rally added $20 billion to the company’s market value from a recent low in late September.
Yet, problems loom. Softbank’s most-valuable holding, Chinese internet company Alibaba Group Holding Ltd., slumped on Monday to a fresh all-time low in Hong Kong before rebounding. More broadly, the selloff in US technology stocks — the Nasdaq 100 Index is in danger of notching up its biggest weekly loss of the year — is weighing on valuations of the kinds of companies that Softbank invests in. Meanwhile, the sluggish market for initial public offerings could weigh on Arm Ltd., the chipmaker that Softbank is trying to list.
“One of the bigger parts of its valuation is Alibaba and it’s been coming down,” said Morningstar Inc. analyst Daniel Baker. “Usually when Alibaba goes down, the stock goes down. The macro factors that are driving this don’t appear to be changing too much.”
Wall Street brokerages are already responding to those worries. This month, analysts cut their target price for Softbank stock, sending the average share price forecast to the lowest since August 2020, according to Bloomberg data. Just last week, Jefferies analyst Atul Goyal downgraded the stock to hold, citing “no upside” in shares after its investments plunged.
In many ways, SoftBank’s shares and value is deeply tied to China’s economy, which is facing issues of its own under the weight of Covid Zero curbs and a stumbling property market. As of June, Alibaba still accounted for about one-fifth of the firm’s total equity value, according to filings. Its Vision Funds, which take stakes in “tech-enabled growth companies,” also are about 20% invested in China.
After touching a fresh low Monday, Alibaba’s Hong Kong-listed shares went on to have their biggest weekly gain since June, up 13%, as the Chinese stock market rallied on speculation that the government will pull back from the Covid Zero policy. The stock is still down 41% this year.
For now, the correlation between SoftBank and Alibaba’s shares have hit the lowest in a year, though that may not last long. For its part, SoftBank has been cutting its stake in the tech firm through the derivative market and has used those profits to pay down debts.
The Japanese conglomerate will try to convince investors that cost discipline and further buybacks will help stave off potentially bad news during its earnings report next Friday. Last quarter, SoftBank posted a record loss following a global selloff.
Still, there is some upside. Softbank is trading at 1.29 times book value, still well below its five-year average. That may provide a good opportunity for bargain hunters.
“In our view, if we actually look at these various value components, we feel that SoftBank Group shares are undervalued,” said Macquarie analyst Paul Golding.
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Amazon.com Inc. shares fell 3.1% Thursday for their seventh straight decline, the longest such streak for the stock since an eight-day rout that ended in August 2019. The e-commerce and cloud-computing company’s shares are lagging behind most of its megacap peers and the market overall this year. The stock was trading higher along with fellow tech companies on Friday on optimism about China’s speculated reopening plans.
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–With assistance from Min Jeong Lee and Subrat Patnaik.
(Updates to market open.)
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