SoftBank stock investors see past credit risks to AI returns

SoftBank Group’s equity investors are increasingly focused on the potential returns from its artificial intelligence bets, helping the stock rebound even as the Japanese company faces higher borrowing costs.

SoftBank shares posted their first monthly gain in four months in September, after OpenAI’s new GPT-6 Astra model rekindled optimism around Masayoshi Son’s $65 billion commitment to the ChatGPT creator. The stock rose 24% in four weeks, helped by OpenAI’s latest plan to raise $30 billion at a valuation of $1.4 trillion. A recovery in chip unit Arm Holdings shares also bolstered confidence about the tech investor’s ability to finance growing debt. SoftBank shares were headed for a weekly gain of about 4% in Tokyo on Friday.

That’s as SoftBank’s credit default swaps jumped to the highest level since 2023 on persistent questions around AI safety and soaring costs and competition. The divergence between SoftBank’s CDS and equities contrasts with a selloff in shares of Oracle, which has cited force majeure to shield itself from surging data center expenses.

“From the equity side, we care a little bit less about the technicality of how they raise money,” said David Dai, a managing director at Sanford C Bernstein in Hong Kong, regarding his view on SoftBank. “Assuming they can raise money, the equity story is actually great because they have got Arm, which is benefiting the most from the rise of agentic AI and server CPU usage.”

Arm and other chipmakers are forecasting hundreds of billions of dollars’ worth of demand for central processing units by 2030. Orders are rising for general-purpose computing as users of services like Meta Platforms’s Muse increasingly ask AI agents to execute code and use web browsers. Dai estimates the market could grow to as much as $330 billion. Arm’s order outlook is also positive, he said.

After nearly halving from their June peak, Arm’s shares are regaining ground: They rose around 20% last month. That shores up the finances of SoftBank, which owns almost 90% of the chip architect, and helps ease some of the fears that’ve spilled over from credit markets. Arm accounts for a big chunk of SoftBank’s asset value.

Beyond Arm, Son’s diverse exposure across the AI landscape, ranging from robotics, data centers and energy, reassures some equity investors. While the billionaire’s growing bet on OpenAI remains a concern, investors take comfort from SoftBank’s plans to expand its footprint in other AI arenas — such as data centers and plans to buy ABB’s robotics unit — as offering upside regardless of who wins the platform race.

SoftBank’s wide-ranging portfolio includes telecom operator SoftBank, with millions of subscribers. The wireless service provider now seeks to benefit from the Asian country’s hunger for AI, building data centers and offering a stack of enterprise services.

“If OpenAI doesn’t do well, sentiment is going to be a lot worse, but they still do own assets in other areas,” said Bloomberg Intelligence analyst Kirk Boodry. “It’s pretty rare to have a stock that is exposed to the global AI boom in that way especially within the Japan context.”

A growing discount to real-time net asset value also offers an entry point to those who believe in AI growth. SoftBank shares traded at a 24% discount to their net asset value as of Sept. 29, wider than the year-to-date average of 20%, according to Bloomberg Intelligence data.

“I think there is certainly potential for the shares to be rerated if the right catalyst emerges,” said Takumi Nishida, a fund manager at Asset Management One, adding that there once was discussion of SoftBank trading at a premium to its net asset value.

Still, Nishida said he prefers to invest directly in AI hardware suppliers such as memory chipmaker Kioxia Holdings, due to intense competition among AI developers and rising borrowing costs. He holds fewer SoftBank shares compared with the company’s weighting in the benchmark Topix index.

He’s not alone. Worries about rising competition among AI models and surging debt remain a drag on SoftBank’s stock.

SoftBank raised $11.1 billion last month via the largest corporate junk bond sale on record to finance Son’s big AI ambitions. While it drew enough demand to lower pricing, borrowing costs were still largely higher than what it has had to pay before.

Some investors are betting on a decline in SoftBank shares, with short interest as a percentage of float rising to 2.36% of shares available for trading this week, a new high for the year, according to S3 Partners.

SoftBank’s persistent discount to its net asset value suggests that equity market is pricing in some degree of credit risk, according to Han Jiho, an analyst at Sparx Asset Management. “If CDS spreads continue to widen, further gains in NAV may have a more limited impact on the share price,” he said.

Even so, the company’s stock price has gained some ground after tumbling from their June peak. They are up around 52% this year. Most analysts expect that trend to continue, with 17 buy ratings, six holds and one sell, according to Bloomberg-compiled data. The average of analysts’ 12-month target price is ¥9,061 ($57.21), compared with Thursday’s close of ¥6,701 in Tokyo.

In the June quarter, SoftBank earned a net profit largely due to its stake in Intel. That gave the tech investor the stamina to await returns from its OpenAI bet and other multibillion-dollar AI projects.

“If the AI boom ultimately turns out to be a bubble and bursts, the damage could be severe given their leveraged investment,” said Hiroki Takei, a strategist at Resona Holdings. “But given the latest earnings, higher borrowing costs are seen more as tail risks, and raising funds through bond issuance is largely viewed as financing for growth investments.”