Commentary: Is Softbank Sinking? Don't Bet On It

The global rout in dot-com stocks has been brutal for Softbank Corp. Between mid-February and mid-April, its shares fell 60%, vaporizing $130 billion of value. The Tokyo software and holding company, now trying to leverage its equity stakes in about 300 companies into myriad global Internet tieups, has also disclosed a currency-generated $528 million pretax loss for the fiscal year ended in March.

So has Softbank turned out to be the ultimate sucker's play--all sizzle and no substance? Hardly. The topsy-turvy markets are obscuring everyone's vision when it comes to evaluating companies. But consider these numbers: In the past 13 months, Softbank's shares have soared from $100 to $1,900 and back down to $680. Do the math and it's clear that the runup is more impressive than the recent drop, dizzying as it was. Softbank shares are up almost seven-fold since March, 1999.

Despite the sell-off, Softbank is still sitting on unrealized gains of roughly $70 billion on its investments. The slump says more about Japan's fledgling Net market than about Softbank. Softbank is the bellwether Internet play in Japan--a market with maybe a dozen truly liquid players, compared with some 200 in the U.S. So a lot of global cash looking for Japan's New Economy is squeezed into a few stocks. When the hordes stampede in or out of these equities, huge swings occur.

Skeptics have deeper concerns, of course. The suspicion is that Softbank founder Masayoshi Son, who has spent $3.8 billion since 1995 on his high-tech plays, is reshuffling assets to mask poor profitability in his core software distribution and publishing business.

NO SCAM. But these suspicions don't stand up to scrutiny. True, Son has sold assets: the Ziff-Davis magazine division; memory device maker Kingston Technology in Fountain Valley, Calif.; and Softbank's 5% stake in antivirus software specialist Trend Micro. But scam theorists ignore that Son made no secret of his strategy to focus on e-commerce and online finance and leave traditional businesses such as magazines. Also, Softbank generates enough cash in its core businesses to service its $2 billion in debt--and has $1.3 billion in the till.

Another issue for the critics is whether Son is dumping strategic Net holdings. Exhibit A is his decision last year to sell 2% of Softbank's 25% stake in Yahoo! Inc. Some of that money went to invest in startups and offset some big write-offs in the Ziff business.

But selling a small stake in Yahoo means little. If anything, Softbank has deepened its ties to Yahoo by setting up joint ventures in Asia and Europe. They are making real profits. So are Morningstar Japan and E*Trade Japan--where Softbank also has stakes.

Finally, Softbank critics insist that Son's Internet portfolio isn't all it's cracked up to be. True, it is tricky to value Son's unlisted holdings. But take a careful look at how well his bets have performed. Unless you think the Internet is a dead-end technology like defunct Betamax, Softbank is one of the most important tech players anywhere.

The punch line: Softbank's trading range of $700 a share and market cap of $70 billion are what the most bearish analysts said the company was really worth back in frothy February. Softbank remains one of Japan's five most valuable companies. Son, of course, has to deliver steady earnings growth. But to suggest Softbank is melting down is about as wild as the gyrations of its shares.