Analysts Chris Lane and David Dai explained in a 258-page report that poor trading among a few of SoftBank's Vision Fund components — as well as an existential crisis at WeWork — shouldn't scare investors away from what will be "enormous long-term gains" for the Japanese holding company.
Investments in either SoftBank or Berkshire Hathaway would have served investors well over the past 10 years. As the analysts note, an investment in SoftBank would have generated returns of over 300% in Japanese yen and 230% in U.S. dollars. A stake in Berkshire would be up about 240% over the same period.
But notwithstanding similar equity returns, the Bernstein comparison between Buffett's Berkshire Hathaway and Son's SoftBank may seem a bit rich to those familiar with their markedly different investment strategies.
Also in Buffett's favor is his far-longer track record: Berkshire's compounded annual gain in per-share book value since 1965 is a robust 18.7%, double that of the S&P 500.
But Lane and Dai anticipated the potential for pushback on their comparison.
"Berkshire's original business, textile milling, seems as distant from insurance as SoftBank's original software distribution business. Synergies between NetJets, Coca-Cola, and BNSF railways are similarly low to nonexistent," Lane and Dai wrote. "Berkshire leverages the cash from its insurance business to invest into other companies."
SoftBank "uses the cash flow from its core telco operation to invest in tech unicorns aiming to disrupt traditional industries," they added. "Berkshire favors existing moats, stability, and cash flow…SoftBank favors disruption and long-term growth. Berkshire's approach is safer…SoftBank's has higher risk."
The consequences of that difference in risk appetite were on full display in 2019 as some of SoftBank's biggest investments made headlines for performance ranging from lackluster to tragic.
SoftBank and its Vision Fund — one of the company's largest pools through which it invests in promising young companies — were forced to take billion-dollar write-downs on WeWork, Slack Technologies and Uber. Its WeWork write-down alone at one point totaled $8.8 billion.
SoftBank's equity is only available on Japanese markets.
Son's growth at all costs stands in stark contrast to Buffett's investment style, marked by ruthless value hunting and the strictest assessment of a company's balance sheet. The so-called Oracle of Omaha has historically made bets on companies with ample free cash flow and reliable dividend payments like Coca-Cola.
That's far from SoftBank's method of throwing cash at a handful of new, profit-bereft companies in the hopes of striking gold in the long term to more than compensate for its initial funding.
Bernstein's analysts are convinced that a stake in SoftBank remains a compelling investment option for traders looking for long-term growth exposure and willing to endure periods of volatility.
"As we argued in our initiation report, quarterly results will be volatile as the fund is required to mark these to market, especially during the early 'negative cash flow' phase of operations," Dai and Lane wrote. But "its global scale and access to unprecedented investment capital ensures it sees nearly every deal of consequence, which should — in theory — allow it to capture significant upside well before traditional market participants."
The two highlighted Alibaba as an example of the types of investments they see as central to SoftBank's long-term success. Its core e-commerce business should enjoy sustainable growth as it expands geographically throughout Asia, which in turn will fuel its cloud computing ambitions, Bernstein said.
Lane and Dai also like SoftBank's stake in Sprint and its merger with T-Mobile, its interest in multiple ride-hailing companies (not just Uber) and Son's 2016 investment in British processor designer ARM remains underappreciated.