Bears circle SoftBank as DeepSeek clouds outlook for Stargate

TOKYO - For SoftBank Group investors looking for the stock to climb back to all-time highs on a revival of the artificial intelligence (AI) boom, DeepSeek poses a major hurdle.

SoftBank is steering a US$500 billion (S$671 billion) fund raising for the Stargate Project to develop AI infrastructure in the US, a plan that is key to founder Masayoshi Son’s drive to establish a leading position in the emerging field. But now, Chinese start-up DeepSeek’s low-cost AI model is begging the question of whether such massive spending is even necessary.

DeepSeek may spark a “near-term market correction” for SoftBank and other AI stocks, said chief executive officer Yun Jung-in at Fibonacci Asset Management Global. While the AI rally should pick up again in the longer term, the focus will be on monetisation, he said, adding that “will take years”.

Investment losses pushed SoftBank into the red for the latest quarter, and analysts’ forward earnings estimates are down around 25 per cent from a late November 2024 peak. Bearishness has risen, with S&P Global data showing short interest in the shares at about 3.8 per cent of the free float, near the highest level in 22 months.

The Tokyo-listed stock received a boost when Mr Son joined US President Donald Trump in January to unveil the Stargate Project with OpenAI and other partners. It then tumbled days later as DeepSeek’s AI model shocked the world.

“Stargate has quite a few negative elements”, and DeepSeek highlights that AI may not actually require so much data centre power, said Mr Kazuhiro Sasaki, head of research at Phillip Securities Japan. SoftBank will be shouldering a lot of the investment itself, and “the interest on that debt is not insignificant”.

The financing burden for Stargate may also limit the stock buybacks that SoftBank has often relied on to support its share price, Jefferies Financial Group analyst Atul Goyal wrote in a note.

Sell-side analysts are still mostly bullish on SoftBank, with the average price target projecting a gain of around 30 per cent in the stock over the next year. Market observers cite the company’s majority stake in AI darling Arm Holdings as one major positive.

SoftBank is “equivalent to effectively investing in Arm but at a substantial discount”, said Mr Masakazu Takeda, a fund manager at Sparx Asia Investment Advisors. He notes Arm is also difficult to buy with so little of the stock in free float.

Big gains in shares of Arm have pushed its forward earnings-based multiple to over 80 times. The UK-based chipmaker got a boost on Feb 13 after the Financial Times reported that it landed Meta Platforms as an early customer for a new chip.

Excitement over Arm and Mr Son’s AI initiative had helped drive SoftBank’s stock to a record high in July 2024 before a global tech sell-off on valuation concerns.

The stock is still down some 20 per cent from its peak, and the prospects for recovery hinge on realising profits from AI.

“Lofty investments in Stargate might hurt the company’s profit in the short run,” Bloomberg Intelligence analysts Marvin Lo and Chris Muckensturm wrote in a note.

“Growing concerns around a potential change in AI economics amid the emergence of DeepSeek’s low-cost, open-source large language models might cool the AI frenzy and thus cap SoftBank Vision Funds investment performance.” BLOOMBERG