Softbank Group (OTCMKTS:SFTBY), whose stake in Alibaba (NYSE:BABA) is worth more than Softbank’s entire market cap, is reportedly considering selling some Alibaba stock. Softbank would use the proceeds to fund the repurchase of its own shares.
Is Softbank desperate? Or is BABA stock expensive at the moment?
I think it’s a little of both. Here’s why.
Masayoshi Son, the founder and CEO of Softbank, doesn’t often makes one major mistake in a calendar year, let alone three, but that’s precisely what happened in 2019.
In November, Softbank reported an $8.9 billion operating loss from its tech investments. The firm’s investments in WeWork, Uber Technologies (NYSE:UBER), and Slack (NYSE:WORK) all fared poorly.
If Softbank hadn’t made those three investments, it would have made money in the third quarter. Instead, it lost a boatload of money, far more than the $442 million operating loss that analysts, on average, were expecting. In the same quarter a year earlier, it had reported a $6.5 billion operating profit.
Let’s consider Softbank’s three losers.
Softbank has invested $18.5 billion in WeWork over the years. In October, after restructuring the company’s finances and sending its CEO packing, Softbank ended up with 80% of the company’s stock, valued at approximately $6 billion based on a revised valuation of $7 billion -$8 billion. That was well below the $49 billion figure bandied about before it aborted its IPO plans.
As for Uber, Softbank owned approximately 12.8% of Uber’s stock after its IPO in May. Uber stock is down nearly 30% from its $45 IPO price.
Finally, Softbank’s affiliates own approximately 7.3% of Slack’s voting shares. Slack went public in June at $26. Its shares closed yesterday at $23.83, an unrealized loss of approximately $90 million since the enterprise messaging platform’s IPO.
Compared to WeWork and Uber, Softbank’s investment in Slack seems like a relative walk in the park.
Interestingly, while 2019 was a terrible year for Masayoshi Son’s Vision Fund, Softbank stock still managed to deliver a total return over the past year of 36%. Much of those gains were due to the pending merger between Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS).
Even if the merger does go through, Softbank would be wise to do something to take attention away from some of its venture capital failures.
Last February, Softbank announced it would buy back $6.5 billion of its stock. That news lifted its share price, but the shares gave back most of those gains in the wake of the botched WeWork IPO.
Softbank owns 26% of Alibaba stock. To generate enough cash to pay for a $6.5 billion share repurchase initiative. it would have to sell approximately 30 million shares of BABA stock, based on current prices.
That’s less than 5% of its 674 million shares of Alibaba stock. With Alibaba Group trading close to an all-time high, it makes a lot of sense for Softbank to sell the shares, given its situation.
I like to say that people sell stocks for all kinds of reasons. In Softbank’s case, it may sell BABA stock to fund a buyback of its own shares.
Although Softbank had some major fires to put out in 2019, the fact that it will still own close to 25% of Alibaba stock even if it does sell 30 million shares of the conglomerate suggests that it doesn’t think that BABA has any long-term issues.
In November, I agreed with InvestorPlace contributor Wayne Duggan, who argued that BABA stock was primed for a big breakout. Up 16% since the middle of November, Alibaba stock could reach $300 by the end of 2020.
I don’t think retail investors should sell BABA stock.
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