The ARM Problem Costing SoftBank $118 Billion
Because of its 90% ownership in chip designer Arm, Japan’s SoftBank has a great vantage point when it comes to artificial intelligence. ARM is reaping the financial benefits of the AI boom.
Making money off of that stroke of luck could be more difficult than you think. Whatever the case may be, SoftBank will surely figure something out. Until the AI hype subsides, that might imply its stock price goes up.
Since reporting better-than-expected results earlier this month, ARM ‘s stock has climbed 67%. The company’s designs are used by nearly every mobile device in the globe. Investors are placing their bets on the company capitalizing on the increasing demand for its chip designs in data centers. Software giant SoftBank’s stock price has up 29%.
Although ARM ‘s earnings forecast exceeded experts’ estimates, the modest public float is also contributing to the rise. Even though the company debuted on the Nasdaq last year, 90% of the ownership remains with SoftBank. As a result, when a large number of investors are eager to buy, the market can see dramatic swings. Daily trading volume for the stock in the previous week or so averaged over 50% of the public float.
Thanks to the upswing, SoftBank’s investment in ARM is now worth $118 billion, which is significantly more than its owner’s $84 billion holding. People who have been following SoftBank for a while will recognize this scenario. Before selling off a smaller portion of its ownership in Alibaba in recent years to fund other investments, the business owned around a third of the Chinese e-commerce behemoth.
As per the conditions of the original public offering, SoftBank is unable to sell ARM ‘s stock until March. However, it may be difficult to make money off of the stake. It may be more difficult for SoftBank to sell due of the limited public float that has caused ARM ‘s stock to soar. If there is a huge sell, the stock could drop significantly.
That’s likely the reason why, despite SoftBank’s massive position in ARM , the stock price hasn’t increased as much as it could. The market is worried that SoftBank won’t be able to cash out before ARM’s surge reaches its peak. In comparison to Nvidia’s valuation of roughly 59 times projected earnings, Arm is currently trading at 107 times, as reported by FactSet.
Putting the ARM stake up as collateral is one option. In this month’s results call, the Japanese firm hinted that it would use Arm shares as collateral for margin loans. However, if public opinion turns against AI and the stock price drops, SoftBank would be exposed.
Another option would be for SoftBank to use prepaid forward contracts, a derivative similar to how it divested its Alibaba holdings. Banks or brokers on the opposite side of the deal would put up cash up front, and SoftBank would have the option to settle the deal with cash or stocks a few years down the road.
The contracts were ultimately settled by SoftBank using its Alibaba shares. That kept the shares out of the market altogether, but the other party’s financial institutions would still have to sell stocks eventually to protect themselves.
Like its previous dispute with Alibaba, SoftBank’s current situation with Arm is something that most investors would give anything to avoid. To be sure, the Japanese tech investor is in a bit of a pickle because of the British chip company’s skyrocketing stock price. And there may not be much time to find a solution before the AI rally cools.
