The Nasdaq whale’s Nvidia sale smells desperate

Shuli Ren, Bloomberg

Masayoshi Son, who runs the world’s biggest venture capital fund, is making waves again.

His SoftBank Group Corp. has sold its entire stake in Nvidia Corp. for $5.8 billion, renewing concerns that tech valuations have become frothy. This transaction marks a sharp U-turn for Son. As recently as the March quarter, SoftBank was busy buying up the AI chip designer’s shares. Nvidia’s stock has risen 44% this year and is now trading at a 42 times earnings, versus around 35 times a year ago.

While it’s healthy to ask if an AI bubble is forming, it would be premature to consider SoftBank’s sale as a sign of a market top. Son is no Warren Buffett.

SoftBank has been dabbling in public markets in recent years, a sharp departure from its core business of spotting unicorns. In late 2020, the conglomerate started a controversial hedge fund side hustle called SB Northstar. This unit bought billions of dollars of US equity derivatives, stoking market volatility and earning SoftBank the nickname of “Nasdaq whale.” By early 2022, however, Northstar had to be scaled down dramatically after incurring a cumulative loss of 746 billion yen ($4.8 billion).

A poor track record aside, Son also has desperate financing needs. SoftBank is racing to lock down its equity investment in OpenAI. In March, it led a funding round at a pre-money valuation of $260 billion, promising to invest $30 billion by year-end. It has put in only $7.5 billion.

To raise money, SoftBank offloaded T-Mobile US shares, sold senior and hybrid bonds, and expanded margin loan facilities backed by Arm Holdings Plc. Including the Nvidia sale, the conglomerate has obtained $30 billion in net financing this year, just enough for the OpenAI investment.

Son has to complete the deal to sustain SoftBank’s earnings. For the September quarter, the Japanese company reported a surprise net income of 2.5 trillion yen, far outrunning the average analyst estimates of 418 billion yen. Sam Altman’s startup played an essential role. SoftBank booked a $12.8 billion fair value gain from its OpenAI shares.

To justify this accounting maneuver, SoftBank noted that at OpenAI’s latest employee share sale, which closed in October, the unicorn was valued at $500 billion, almost double its entry point. But more than half of this unrealized profit came from forward contracts, which might have to be reversed if SoftBank is unable to close its follow-on investments by December.

Son has been rewarded handsomely for his AI investments. SoftBank’s shares hit a record high in October, in large part because it controls ARM, known for licensing Central Processing Unit, or CPU, architecture to partners like Nvidia. And the Japanese firm reported its best quarterly income in three years thanks to paper gains from its OpenAI shares. As a result, the businessman will only double down, looking at billion-dollar acquisition targets.

On the other hand, Son’s ambition is not backed by deep pockets. As SoftBank gets busy reshuffling its massive portfolio, the company will have to sell the most liquid assets on hand to fund its chairman’s shopping spree. Nvidia was not the first and won’t be the last.

In 2020 when SoftBank was making huge derivatives bets, traders complained that its entry into the stock market was dangerous and created extreme volatility. Unfortunately, the Nasdaq whale is back.

Courtesy Bloomberg/ Shuli Ren