SoftBank Group (SFTB.Y -2.83%), a Japanese telecom company that expanded into a diversified conglomerate with investments across the technology, energy, and financial sectors, has been a volatile stock in recent years.
The bulls were impressed by its $100 billion tech-focused Vision Fund, which it co-owns with other major investors. SoftBank also acquired chip designer ARM Holdings in 2016, and merged its subsidiary Sprint with T-Mobile earlier this year.
The bears often highlight the messy performance of SoftBank's investments, including Uber's disappointing IPO and WeWork's failed IPO, the slow growth of its domestic telecom business, and the potential impact of the new Japanese recession.
Nonetheless, investors who stuck with SoftBank through all the peaks and troughs are sitting on a 70% gain over the past five years. Does this divisive stock still have room to run?
Simplifying SoftBank's sprawling business
SoftBank Group generates most of its revenue from five core segments: (1) the SoftBank Vision Fund and other SBIA (SoftBank Investment Advisers) managed funds; (2) SoftBank's core telecom business, which also trades separately as SoftBank Corp.; (3) chip designer ARM; (4) the cellular distribution service Brightstar; and (5) its other businesses. The group's total revenue rose 1.5% to 6.19 trillion yen ($56.8 billion) last year.
It generated 79% of its revenue from SoftBank Corp. The segment's revenue and net income grew 4% and 2.5%, respectively, fueled by the steady growth of its wireless, broadband, and internet-related businesses. The unit also streamlined its telco business by consolidating Yahoo Japan into a new company called Z Holdings, then merging it with messaging company LINE.
Unfortunately, the Vision Fund and SBIA unit racked up big losses due to misguided investments in Uber and WeWork, while lower licensing fees and royalty payments eroded ARM's profitability. Those headwinds resulted in a full-year net loss of 962 billion yen ($8.8 billion) -- compared to a profit of 1.4 trillion yen in 2018.
The road ahead
SoftBank Group didn't provide any guidance for the current year, but SoftBank Corp. expects its revenue to rise 1%, with 2.5% earnings growth -- which could ramp up the pressure on the group's weaker segments to pick up the slack.
SoftBank Group notably launched three 500 billion-yen ($4.6 billion) buybacks over the past three months to offset its losses from WeWork and Uber. Each of those aggressive buybacks could reduce its outstanding shares by nearly 5%.
However, it would have been wiser for SoftBank to conserve its cash to reduce the 13.1 trillion yen ($120 billion) in short- and long-term debt it was still shouldering at the end of March.
SoftBank also pays a dividend, but its low 0.8% yield won't win over income investors, and its high debt and lack of near-term profits could throttle its ability to raise its dividend.
SoftBank's stock is cheap for obvious reasons
SoftBank Group's stock looks cheap at just over 10 times forward earnings. However, it's cheap for two simple reasons: Its core Japanese market just entered a recession and other comparable stocks offer more value.
Investors looking for a better telecom stock should arguably stick with SoftBank Corp, which generates stronger stand-alone growth with a forward yield of 6%, or Verizon, which pays a 4.5% yield. Meanwhile, investors seeking a stronger portfolio of investments should take a closer look at Chinese tech giant Tencent instead.
SoftBank Group's growth might stabilize in the future, but its tepid growth, tiny dividend, high debt, and messy streak of investments don't make it a compelling buy right now.