As Softbank CEO Masayoshi Son has complained in the past, his company trades at a discount to its net asset value. A lot of what Softbank owns is stakes in other publicly traded companies, and when you add up the total value of those stakes, less Softbank’s debts, you get a number significantly higher than Softbank’s own market capitalization. This suggests investors believe Softbank is worth less than the sum of its parts, and that management is literally adding negative value, taking some of the profits thrown off by those valuable corporate stakes and, for example, investing it in WeWork. So when I last checked in on Softbank in February, it was because Paul Singer, who runs the hedge fund Elliott Management Corp., had a suggestion: Just give profits to shareholders instead of coming up with weird, dumb ideas about how to lose them in new investments.
Naturally, Softbank has found a new, weird thing to do with its investors’ cash: buying options that will pay off if tech company share prices continue to soar. The Financial Times reported last week that Softbank is the so-called “Nasdaq whale,” which has bought call options — options to buy stock at a specific price on a specific future date — on major tech companies like Amazon and Google in quantities large enough to move those stocks’ prices upward. Softbank has also bought billions of dollars stock in some of these firms.
The thing about these investments is investors can make them directly: Why pay Softbank’s management to buy Amazon stock (or Amazon stock options) for you when you can do so through your own broker? One possibility is that you’re paying for the especially good judgment of Softbank founder Masayoshi Son, who knows the right stocks to buy, but that’s a tough argument given the previously discussed fact that Softbank stock trades at a discount to the value of Softbank’s holdings, meaning the market has deemed his management to be worth less than nothing. That said, at least the bet Softbank is making here is one a lot of other investors have made recently, too — that the global economy will recover from the coronavirus crisis faster than many experts had feared earlier this year, and that tech companies will perform especially well through and after the crisis, as people rely on technological solutions to adjust to pandemic conditions.
Plus, buying interests in publicly traded companies instead of privately held ones could be a way to limit the damage Son is likely to do. When you buy stock in Google or Amazon, you might pay too much, but at least you’re paying a price that other participants in the market have shown a willingness to pay. When you buy a stake in a private company, as Softbank showed us with WeWork, there’s no limit to how much you can overpay. Son might be right about the big tech firms, but if he is wrong, at least investors can take solace that he was only about as wrong as many other investors.
Unfortunately, unlike simple purchases of shares, options trading offers a way to be significantly more wrong about a public company than the rest of the market, which is a reason Softbank investors would like more information about what, exactly, the company is up to with their funds. The company has innovated before in technology investing — not always in a good way — and the possibility of new innovation is reason for more concern for investors who would really just like to enjoy ownership of Softbank’s already-valuable assets.
