(Editors' Note: Softbank trades under the symbol 9984 on the TSE with average daily volume in excess of 150B yen. It also trades in the US as an ADR under SFTBY.)
Since Marissa Mayer took the helm of Yahoo (YHOO), shares of the Sunnyvale-based company have more than doubled; while the company's rebounding stock price has been driven in part by Mayer's turnaround efforts, much of the increase can be tied to the company's 24% stake in Alibaba, China's leading e-commerce company, and investors' desire to gain exposure to it ahead of its expected IPO. However, investors looking to establish exposure to Alibaba today will likely do well to look east, away from Sunnyvale and to Tokyo, home of SoftBank (OTCPK:SFTBY), one of Japan's largest wireless carriers, and the owner of 37% of Alibaba. However, this is only the beginning of what investors will receive.
Though SoftBank is one of the largest wireless carriers in Japan, the company's true value lies in its portfolio of equity investments; while the company's investment portfolio is diverse, the bulk of the value lies in four investments, with the company's 37% stake in Alibaba serving as the crown jewel. Its 80% majority stake in Sprint (S), its 42% stake in Yahoo Japan, and a 34% stake in Renren (RENN) follow its stake in Alibaba. Concerns over Sprint's performance in the United States have pushed SoftBank's Tokyo-listed shares (trading under the ticker 9984) down over 17% year-to-date, with its ADRs falling almost 15% so far in 2014. This decline, however, has created an attractive entry point for perspective investors, for SoftBank now trades below the combined value of these four equity stakes (Alibaba's valuation is based on Bloomberg consensus), and that is without ascribing any value to the company's core Japanese operations. Based on current prices, we see upside of at least 33%, with further gains possible with continued appreciation in the value of Alibaba, Yahoo Japan, Renren, and a recovery of Sprint's own share price back to 52-week highs. Unless otherwise noted, financial figures and managerial commentary will be sourced from either SoftBank's consolidated financial statements for the nine months ended December 31, 2013, or its Q3 2014 (the company's fiscal year ends in March) earnings presentation.
Valuing the Many Pieces of SoftBank
Although SoftBank owns stakes in a variety of companies, the bulk of the value of its equity portfolio is held in the following: Sprint, Yahoo Japan, Renren, and Alibaba. We break down the value of these stakes in the table below. We note that for Alibaba, we model a valuation of $153 billion, based on a consensus estimate compiled by Bloomberg of analysts covering the company (as of February 5, 2014), and that an IPO of Alibaba may lead to significant changes in the company's valuation, depending on market conditions, quarterly results, and other factors. While a fully accurate valuation of Alibaba will not be available until the company completes its IPO, the figure we have used is derived from a Bloomberg consensus of all the analysts covering Alibaba, and in our view, represents the market's current belief in the company's overall equity value. Naturally, different valuations will yield different estimates for Alibaba's value to SoftBank. However, we do note that Amazon (AMZN) holds a market capitalization of over $162 billion, and Alibaba's net income is exponentially higher than that of Amazon.
In the table below, we break down the value of these equity stakes, with a dollar-yen exchange rate of 1:101.911 (share prices for New York-listed equities reflect the close of trading on February 13, and the share price for Yahoo Japan is current as of the close of trading in Tokyo on February 13).
SoftBank Publicly Traded Equity Stakes
Total Shares Outstanding
Local Currency Value ($/¥)
Yen Value per SoftBank Share*
*Based on 1,188,428,300 outstanding shares
SoftBank's three core publicly traded stakes are worth ¥3,551.64 per share, representing over 47% of the company's current market capitalization (based on a February 13 share price of ¥7,506). However, that does not take into account the company's stake in Alibaba. Based on a valuation of $153 billion, and SoftBank's 37% stake, the company's Alibaba investment is worth ¥5,769,181,710,000 or ¥4,854.46 per SoftBank share. Together, SoftBank's four equity investments are worth ¥8,406.10, well above its current share price. But, as we mentioned above, this does not take into account the value of SoftBank's underlying operations or assets. Conservatively, we will base our valuation of SoftBank's underlying operations on its equity attributable to owners of the parent, less the company's equity method investments, in order to avoid double-counting its equity stakes. This methodology yields a figure of ¥1,407.71 for SoftBank's core operations, and a total aggregate value of ¥9,813.81, or more than 30% above SoftBank's February 13 closing price of ¥7,506.
While such upside is notable, we believe it to be conservative. A price target of ¥9,690.86 gives credit only for the value of the investments that it has already made, and the present value of its core Japanese operations, and fails to ascribe any value to the company's future growth potential, either in Japan or the United States. And as we will show below, the latest quarterly results at both Sprint and SoftBank show solid progress at both companies.
Sprint: The Turnaround Continues
Sprint's own Q4 2013 results were released on February 11, with the company making continued progress. Its net loss of 26 cents per share beat consensus estimates by 7 cents, and revenue of $9.142 billion grew by 1.52% year-over-year. We present an overview of Sprint's Q4 and 2013 results in the table below.
Sprint Q4 & 2013 Results (in Millions of $)
Postpaid Net Additions
Prepaid Net Additions
Wholesale Net Additions
Consolidated Net Subscriber Additions
Across most metrics, Sprint performed well in both Q4 2013 and the year as a whole. While revenue growth was below 2% in both periods, pro forma EBITDA grew by double digits in both Q4 2013 and 2013 as a whole, and operating losses narrowed dramatically, with margin expansion in both EBITDA and operating income terms, as Sprint kept control of product costs (smartphones now account for 95% of postpaid sales and 66% of prepaid sales), which fell 8.75% in Q4 2013 and 4.34% in 2013, and benefited from lower depreciation. While churn increased in 2013 as a whole, it is due primarily to performance issues in the early part of 2013, and we note that churn has trended down in Q4 2013 relative to both Q4 2012 and 2013 as a whole in both the prepaid and postpaid business. We also note that Sprint has managed to grow ARPU at both the prepaid and postpaid business during Q4, and we believe that a slight drop in full-year prepaid ARPU is more than offset by a meaningful increase in full-year 2013 postpaid ARPU to $63.29.
We turn now to Sprint's subscriber performance, which requires further clarity to fully understand. On the surface, Sprint put in a decidedly mixed performance during the quarter. While Sprint did add a net total of 477,000 subscribers during the quarter, it lost a total of 69,000 key postpaid subscribers, and for all of 2013, the company's postpaid losses stand at over 2 million. However, Sprint's subscriber performance in both years is affected by several factors. The first is the shutdown of the Nextel network. While this has cost Sprint subscribers given its 38% postpaid Nextel recapture rate, the decision has helped Sprint cut costs and boost margins. The second is the acquisition of Clearwire, as well as the acquisition of hundreds of thousands of subscribers from U.S. Cellular (USM), which came to Sprint as part of a spectrum deal made with U.S. Cellular. These two acquisitions were never about subscribers, and many have chosen to leave Sprint upon the completion of the transactions. As Sprint's earnings release notes, subscriber performance at its core Sprint division was far better than the consolidated figures suggest, and we break down the company's subscriber performance below.
Sprint Subscriber Additions by Segment, Q4 2013 & 2013
Sprint Postpaid Net Additions (Losses)
Sprint Prepaid Net Additions (Losses)
Sprint Wholesale Net Additions (Losses)
Total Sprint Net Additions (Losses)
Nextel Postpaid Net Additions (Losses)
Nextel Prepaid Net Additions (Losses)
Total Nextel Net Additions (Losses)
Transaction Net Postpaid Additions (Losses)
Transaction Net Prepaid Additions (Losses)
Transaction Net Wholesale Additions (Losses)
Total Transaction Net Additions (Losses)
Consolidated Postpaid Net Additions (Losses)
Consolidated Prepaid Net Additions (Losses)
Consolidated Wholesale Net Additions (Losses)
Consolidated Net Additions (Losses)
As the table above shows, consolidated subscriber performance was significantly affected by performance outside the core Sprint segment. Sprint itself added 682,000 net subscribers during the quarter, including 58,000 postpaid subscribers, staunching its full-year loss to just 96,000. While the company added 423,000 total subscribers in 2013, this is a far cry from the more than 4 million added in 2012, there are several reasons for this subpar performance. First, as Sprint moved closer to shutting down its Nextel network, and therefore losing millions of Nextel subscribers in the process, the conversion of some of those subscribers inflated Sprint's net additions during 2012. The second reason lies in Network Vision, Sprint's comprehensive network overhaul program. CEO Dan Hesse spoke at length on Sprint's Q4 earnings call about the relationship between Network Vision and subscriber retention. Hesse noted that during network construction, there is an above average disruption to voice service, which leads to elevated churn in affected markets. But, as the network modernization in these markets reaches 70%, churn begins to decline, and in markets that are between 70% and 100% completed, churn stands below pre-Network Vision levels, as shown in the slide below.
In addition to elevated churn, Sprint has noticed an inverse relationship between the impact of Network Vision construction and the probability that a current Sprint customer will recommend the network to others, and CEO Dan Hesse noted that there is a statistically significant correlation between this probability of recommendation and Sprint's gross subscriber additions.
We believe that in 2014, Sprint's core subscriber additions will rebound as Network Vision moves forward and LTE is rolled out further across the United States and Sprint rolls out Sprint Spark to new markets across the country. In any case, Sprint's own guidance calls for further growth in 2014. The company is forecasting pro forma EBITDA of $6.5-$6.7 billion in 2014; at the midpoint that would represent year-over-year growth of over 22%. Sprint remains committed to its aggressive Network Vision rollout; the company has forecast 2014 capital expenditures of $8 billion, representing a 7.37% increase versus 2013, during which capital expenditures grew by almost 39%. In our view, Sprint posted a solid Q4, and that as the company continues its turnaround, its own stock price will rise, thereby causing SoftBank's own stock to rise as well. However, the United States is not the only market where SoftBank is seeing positive results. Its home market is also performing quite well, as SoftBank's own quarterly results show.
SoftBank in Japan: Progress at Home
In addition to decent performance in the United States, SoftBank posted solid results in Japan. With 4.1 million net subscribers added to its Japanese business in 2013, SoftBank led the Japanese wireless industry in net subscriber growth; well ahead of NTT DoCoMo's 1.19 million, and 2.8 million for au (owned by KDDI). For Q3 as a whole, SoftBank added 692,000 wireless subscribers, inclusive of 716,000 net postpaid additions and 24,000 net prepaid losses. We note that while revenue at SoftBank's mobile division rise by 28.3% to ¥2,2203,828,000,000 in the first 3 quarters of the fiscal year, the increase was due in large part to the consolidation of certain non-Sprint mobile subsidiaries, thereby obscuring growth in revenues and operating income, which rose by 22.7% year-over-year. However, other comparative metrics, which present a more accurate picture of performance, were largely favorable. While churn rose 16 basis points year-over-year during the quarter, SoftBank's core churn rate stands at 1.28% (1.24% for postpaid subscribers), and much of the decline was driven by non-voice devices reaching the end of their 2-year contracts during the quarter.
For Q3, consolidated ARPU stood at ¥4,490 (of which data ARPU was ¥2,960). While consolidated ARPU fell 3.23% year-over-year, data ARPU increased by 5.71%. While it is true that SoftBank has seen volatility in its domestic ARPU, the company's long-term ARPU performance meaningfully exceeds that of its domestic competitors.
Since 2008, both au and NTT DoCoMo have seen sharp slides in ARPU, with SoftBank the only major Japanese carrier to record an increase in domestic ARPU since 2008. SoftBank's ARPU has been underpinned by the Japanese launch of the iPhone 5s and 5c, with the company capturing 39% of 5s and 5c sales, representing a plurality of the Japanese market; au's share stands at 31% and NTT DoCoMo's stands at 30%. And within the Android ecosystem, SoftBank's outperformance is even more notable. The company now holds a 47% share of new Android handset sales, versus 35% for NTT DoCoMo and 18% for au, with the company steadily taking share since the beginning of 2013.
Based on multiple metrics, SoftBank's core mobile business is performing well. The company continues to add subscribers, and take market share in both iOS and Android sales.
The challenge now is to ascribe a valuation to SoftBank's core mobile business (for purposes of conservatism, we will not ascribe any value to SoftBank's fixed line business, which remains solidly profitable, posting over ¥87 billion in segment income in the first three quarters of the fiscal year). With SoftBank's headline EPS figures obscured by Sprint, its fixed line business, and its Internet business, the portion of EPS attributable to SoftBank's mobile business is unclear, given the difficulties of allocating exact costs to the division. However, an educated estimate can still be reached. Per its Q3 financial statements, SoftBank's mobile division posted segment income of ¥514.579 billion in the first three quarters of the year, implying a quarterly run rate of ¥171.526333 billion, or an annualized ¥686.105333 billion in segment income. Applying Japan's statutory corporate tax rate of 38.01% yields core segment net income of ¥425.316696133 billion, or ¥357.88 per share, based on SoftBank's currently outstanding share count. The table below summarizes these calculations.
SoftBank Mobile Communications Income
9-Month Mobile Segment Income
Average Quarterly Income
Implied Annual Segment Income
Japanese Statutory Tax Rate
Implied Segment Tax
Implied Segment Net Income
Implied Net Income per Share
On an annualized basis, this implies a value of over ¥357 per share for SoftBank's core mobile business, if the business were to be valued at a P/E multiple of 1. Naturally, if a less conservative multiple were used, the mobile segment's value would be far higher; as a frame of reference, KDDI trades at over 13x its estimated fiscal 2014 EPS. We note that this valuation does not factor in any future growth for the division; it simply annualizes SoftBank's performance in the last three quarters. When added to the value of SoftBank's equity investments and core assets, SoftBank's total per share value rises to ¥10,171.70. While such a methodology does effectively double count the value of SoftBank's mobile operations, first by accounting for the value of its segment income, and then within SoftBank's core assets, we believe that the issue is mitigated by the fact that the income generated from SoftBank's remaining businesses (fixed line communications and Internet) is ascribed no value. This process demonstrates that valuation is an art, not a science; while we believe that our methodology has produced a fair result, we acknowledge that other methodologies may yield different price targets. A price target of ¥10,171.70 represents upside of over 35% relative to SoftBank's February 13 closing price of ¥7,506 (due to the time differential between Tokyo and New York, a February 14 closing price will likely be established by the time of publication).
For investors here in the United States, ADRs are also available. SoftBank trades under the ticker SFTBY, with each ADR representing 0.5 Tokyo-listed shares. Taking our pro forma price target of ¥10,171.70 and applying the current dollar-yen exchange rate yields a price target of $49.90 for SoftBank's ADRs, representing upside of 33.78% for the company's ADRs.
We believe that at present levels, shares of SoftBank are meaningfully undervalued. Without taking into account the potential for future growth, the company trades well below the value of its stakes in Sprint, Renren, Alibaba, Yahoo Japan, and the value of its own operations. While SoftBank gives investors meaningful exposure to Alibaba, it offers far more in addition to that, and we believe that at present levels, shares of SoftBank represent a compelling investment. When the growth potential of both Sprint and SoftBank's own mobile operations is factored in, the company's fair value is even higher, and we believe that as 2014 progresses, that value will begin to be unlocked.