SoftBank undervalued as AI bets could narrow deep NAV discount: UBS

Investing.com -- SoftBank Group is trading at a steep discount despite holding some of the world’s most valuable artificial intelligence assets, and analysts see room for that gap to narrow as its AI bets gain clarity.

UBS lifted its price target on the stock to 23,500 yen from 17,400 yen, valuing SoftBank’s net asset value (NAV) at 42.5 trillion yen, or 29,568 yen per share, and applying a 20% discount. That compares with a five-year average discount of around 50%.

“With Stargate, the OpenAI stake, and further AI-related semiconductor investment, businesses for which we can project likely earnings will account for about 85%–90% of NAV,” analyst Kenji Yasui said in a note.

"As a result, not only should NAV expand, but the possibility of reduced discounts has emerged," he added.

SoftBank’s NAV has long been dominated by Arm, accounting for roughly half. But Yasui highlighted that reasons for the heavy discount have begun to fade, with the rate shrinking sharply from 63% in June to 24% in September, driven by investor focus on the company’s AI holdings.

UBS values Stargate at 5.7 trillion yen based on a 5GW data-center project and OpenAI between 2.3 trillion and 4 trillion yen, depending on whether SoftBank’s stake reaches 6.7% or 11.5%. Arm is estimated at 22 trillion yen.

The bank incorporated the median 3.2 trillion yen figure for OpenAI into its NAV model. “We think NAV should be 42.5trn and that a discount rate of 20% is appropriate,” the note states.

UBS also assumed only half of the Vision Fund’s most recent 10.7 trillion yen valuation, reflecting uncertainty around its broad portfolio.

Yasui acknowledged the uncertainty around Stargate, where SoftBank has yet to finalize location and scale, and around OpenAI’s transition to a for-profit structure. For its target, UBS factored in only a 20% probability of a 1GW Stargate project while recognizing potential upside if larger projects proceed.

Yasui also pointed out earlier OpenAI investments, noting SoftBank’s participation in a 2024 fundraising round at a $157 billion valuation, which could grow more than threefold in value depending on subsequent allocations.

UBS mapped scenarios ranging from a downside where OpenAI falters and Stargate is deemed unnecessary, cutting NAV per share to about 22,000 yen, to an upside where OpenAI surpasses targets and Stargate expands, which would lift NAV meaningfully.

Its current 23,500 yen price target sits between the base and optimistic cases. Even so, Yasui argues the changing asset mix makes it harder to justify a steep discount.

“We do not believe that the equity market, which is eagerly seeking AI stocks, will continue to justify the discount applied to SoftBank, for which some 80% of assets are comprised of global cutting-edge AI assets including Stargate, OpenAI, and ARM,” he wrote.