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SoftBank’s Bet on Exponential Growth

I am about to go out on very thin ice. I am a value investor, but I’ll probably get banned from the value community for what I am about to say: Current valuations don’t mean much for companies in industries that are entering an exponential growth phase. As I type this, I catch myself thinking that it sounds so “dot-commish,” but bear with me as I try to bring my statement into a more familiar value framework.

Wall Street hates SoftBank’s recent decision to purchase ARM Holdings for £24.3 billion ($32 billion) — at a whopping 48 times earnings! SoftBank is paying a 43 percent premium for an already richly priced stock, and it doesn’t have any synergies with the U.K.-based supplier of semiconductor intellectual property — there are no costs to cut or additional revenue to capture by adding ARM to its existing businesses. Masayoshi Son, SoftBank’s founder and CEO and the reason my firm owns SoftBank stock, is not liked today as a result of the deal. I heard this (understandable) reaction from a friend about Son and the ARM purchase: “a bored rich man who needs to spend because he has too much.”

To understand this acquisition, we need to come to terms with Son’s investment strategy and his mental models that have made him the richest person in Japan. Son is a master of exponential (nonlinear) thinking. Examine his past investments and you’ll find that he identifies industries about to go from high but linear growth into the exponential phase — where the rate of growth is accelerating.

Son has done this over and over again during the past 40 years. It started with PCs in the ’70s, when he built a software distribution business in Japan to capitalize on PC growth entering the accelerating phase. He saw the inflection point of Internet growth in the ’90s, bet on Yahoo and created Yahoo Japan (a joint venture with Yahoo).

In the early 2000s he saw e-commerce and the Internet taking off in China and purchased a stake in Alibaba, turning his $20 million investment into $60 billion today.

Son had the insight that the wireless market, which was already growing nicely, was about to explode due to the popularity of smartphones. True story: He went to Steve Jobs with a drawing of an iPod with a superimposed dialing pad and asked him to make a smartphone. This was before Apple even announced plans for the iPhone.

More important, to capitalize on this realization he bought the worst-run wireless mobile carrier in Japan (a very unpopular move at the time) and transformed it into the best one — a huge source of SoftBank’s cash flow today.

#$SFTBY #$ARMH #Softbank #arm holdings

Buying Warren Buffett, Richard Branson and Steve Jobs at a Discount

What would you get if you crossed Warren Buffett, Richard Branson and Steve Jobs? Answer: Masayoshi Son, the Korean-Japanese, University of California, Berkeley–educated founder of one of Japan’s most successful companies, SoftBank Corp.

Just like Buffett, Son is a tremendous capital allocator with a very impressive record: Over the past nine and a half years, SoftBank’s investments have had a 45 percent annualized rate of return. A big chunk of this success can be attributed to one stock: Chinese e-commerce giant Alibaba, a $100 million investment SoftBank made in 2001 that is worth about $80 billion today. Though you may put Alibaba in the (positive) black swan column, Son’s success as an investor goes well beyond it — the list of his investments that have brought multibagger returns is very long. Today, at the tender age of 57, he is the richest man in Japan, and SoftBank, which he started in 1981 and owns 19 percent of, has a market capitalization of $72 billion.

Son, like Apple co-founder Jobs, is blessed with clairvoyance. He saw the Internet as an amazing, transformative force well before that fact became common knowledge. In 1995 he invested in a then-tiny company, Yahoo!, earning six times his investment. But he didn’t stop there; he created a joint venture with Yahoo! by forming Yahoo! Japan, putting about $70 million in a company that today is worth around $8 billion. (Yahoo! Japan is a publicly traded company listed in Japan).

What is shocking is that Son saw that the iPhone would revolutionize the telecom industry before Apple announced it or even invented it. See for yourself in this excerpt from an interview with Charlie Rose, where Son describes his conversation with Jobs in 2005 — two years before the iPhone was introduced:

“I brought my little drawing of [an] iPod with mobile capabilities. I gave [Jobs] my drawing, and Steve says, “Masa, you don’t give me your drawing. I have my own.” I said, “Well, I don’t need to give you my dirty paper, but once you have your product, give me for Japan.” He said, “Well, Masa, you are crazy. We have not talked to anybody, but you came to see me as the first guy. I give to you.”

Similar to Virgin Group founder Branson, who had the testicular fortitude to create Virgin Atlantic Airways in the U.K. to compete against the state-owned behemoth British Airways, Son started two telecom businesses in Japan — one fixed-line and one wireless — with which he challenged the state-owned NTT monopoly. In 2001, disgusted with Japan’s horrible broadband speeds, he convinced the government to deregulate the telecom industry. When no other companies emerged to compete with NTT (I don’t blame them, really), Son took it upon himself to start a fixed-line competitor, Yahoo! BB (Broadband). Thanks to him, now Japan enjoys one of the highest broadband speeds in the world and Yahoo! BB is a leading fixed-line telecom.

It took Son four years to bring his broadband business to profitability. This is how the Wall Street Journaldescribed that period in 2012:

“The problems at the broadband unit contributed to losses for the entire company for four consecutive years. Mr. Son set up an office in a meeting room 13 floors below his executive suite to be closer to the problem unit. He slept in the office at times and routinely summoned executives and partners for meetings late at night. . . . He worked out of the meeting room for 18 months, until the broadband unit had cut enough costs and moved enough customers to more lucrative plans.”

A normal person might have taken a break and enjoyed the fruits of his labor at that point, but not Son. Just as his broadband business went in the black, Son executed on his vision for the Internet and bought Vodafone K.K., a struggling, poorly run wireless telecom in Japan. SoftBank paid about $15 billion, borrowing $10 billion.

Continue reading on Institutional Investor ….

#$SFTBY #SFTBY

Why Alibaba is a big deal (largest IPO in history): Your cheat sheet.

With the heir apparent to Amazon set to trade under new ticker symbol BABA on Friday, September 19th, the time is ripe for YOU to see the forest for the trees. However, there are more voices in the press than one can shake a stick at.

Here is where to focus:

Jack Ma's Letter to Alibaba investors

In it, this single sentence about Alibaba's culture, may revolutionize the way other companies do business. "I have said on numerous occasions that we will put customers first, employees second, and shareholders third."

Next: Read what Brad Stone, author of The Everything Store: Jeff Bezos and the Age of Amazon, has to say in:

Alibaba's IPO May Herald the End of U.S. E-commerce Dominance

"The promise of (Alibaba's) frictionless, cross-border commerce is tantalizing. Buyers will have an entire world of sellers from which to choose. Increased competition will depress and standardize prices around the world, so a company like Apple can no longer charge one price for the iPad in Europe and another in the U.S."

Alibaba Profit More Than Amazon and EBay Ahead of U.S. IPO

An important question we're all asking is whether Alibaba makes money. According to Bloomberg, operating income in the three months ended June, was 42 percent more than the combined profit of Amazon and EBay for the period.

In The Journey of a 102 years begins the Economist declares, "There are good reasons to hop onto the magic carpet".

Reading between the lines we can also infer that given its financial stature, and dominance in China's e-commerce market, it unlikely that Alibaba's IPO will 'Bust' (newly public stock falls quickly below offering price) like Facebook's did.

What does Amazon have to say about Alibaba?

Since Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions, I always like to start there. This morning's headline:

U.S. Retail Investors Are Not That Interested In An Alibaba IPO

Before you pull the trigger to invest in Alibaba, please read Form F-1, which was amended most recently on September 5, 2014. The views in this article are my own and not those of my employer, BG Strategic Advisors.

If you’re interested in more breaking news about Alibaba or direction of its stock, please follow me on Twitter @AbeGarver