SoftBank Earnings: Earnings in Line; Large AI Investment Announced

We retain our fair value estimate of JPY 1,660 per share for SoftBank following its fiscal 2023 results (year-ending March 2024). Management provided fiscal 2024 guidance of 2% revenue growth, 3% operating income growth, and 2% net income growth. At first glance, this seems conservative compared with the reported fiscal 2023 revenue growth rate of 3%, underlying operating income growth rate of 14%, and underlying operating income growth of 45%. However, management outlined a plan to invest heavily in artificial intelligence, expecting this segment to contribute a JPY 55 billion loss in fiscal 2024. Excluding this investment, the fiscal 2024 operating profit growth guidance would have been around 8.5%, which is more in line with what we’d expect from 3% revenue growth in a high fixed-cost business like telecom. We retain our narrow moat rating based on cost advantage and efficient scale in SoftBank’s core telecom business. Our forecast for underlying average operating profit growth over the next five years is 5.7% per year, driven mainly by forecast growth in payment services, LY, and lower competitive intensity in mobiles. We see the shares as slightly overvalued at these levels.