SoftBank swings to $7 billion loss as AI data center costs mount

SoftBank reported a fiscal second-quarter net loss of 1.12 trillion yen, about $7 billion, as costs from its U.S. AI data center buildout and declining portfolio values wiped out gains, CNBC reported.

The loss compares with a net profit of 2.5 trillion yen in the same quarter a year earlier, a sharp reversal. Revenue came in at 2.22 trillion yen, beating analyst estimates of 2.02 trillion yen compiled by LSEG.

The biggest drag was a 597.2 billion yen loss, about $3.7 billion, from changes in procurement plans for power generation equipment at U.S. AI data center projects. SoftBank said it made advance investments to secure turbines and transformers amid concerns about shortages and long lead times. Cumulative payments for power generation equipment totaled $9.48 billion as of Sept. 30, mostly for the PORTS-Pike Technology Campus in Pike County, Ohio.

Power is the bottleneck of the AI buildout. Data centers require enormous electricity, and the U.S. power grid cannot deliver it fast enough. Companies that can secure generation equipment get capacity; companies that cannot wait years. SoftBank chose to pay in advance, and the decision cost $3.7 billion when plans changed.

The Vision Fund segment swung to a loss of 81.58 billion yen, compared with a profit of 2.38 trillion yen a year earlier. Vision Fund 1 recorded an investment loss of $20 million, as a $1.3 billion gain on ByteDance was offset by declines in publicly traded portfolio companies including Coupang and Grab. Vision Fund 2 posted investment gains of 89.26 billion yen.

SoftBank’s OpenAI stake is the counterweight to all the losses. The company has invested $54.6 billion in OpenAI, which it values at $99.6 billion, for a cumulative gain of $45 billion. SoftBank said a potential increase in OpenAI’s valuation from a new funding round has not yet been reflected in its results, and could boost its net asset value in the fiscal third quarter.

“ChatGPT has been continuously a weapon of OpenAI, especially for consumers,” a SoftBank executive said during the earnings call, highlighting the chatbot’s growing user base.

SoftBank has committed to a 20-year lease agreement with OpenAI for eight gigawatts of IT capacity at its Ohio data center project. Eight gigawatts is roughly the power consumption of a mid-sized U.S. state. The scale of the commitment reflects SoftBank’s bet that AI computing demand will grow for decades.

The company is expanding beyond the U.S. On Monday, SoftBank announced plans with Grab and Malaysia’s PETROS to commit a combined $1.85 billion in initial capital to develop AI infrastructure in Malaysia, with a long-term target of at least five gigawatts of AI computing capacity.

Despite the loss, SoftBank shares closed 13.9% higher on Tuesday, rising with Asian technology stocks after an overnight rebound on Wall Street. Samsung Electronics and SK Hynix also gained. The rally suggests investors are looking past the quarterly loss to SoftBank’s AI positioning, or that the loss was less bad than feared.

SoftBank is addressing concerns about water consumption at its planned data center in Texas, saying it will use a closed-loop, air-cooled system to reduce water use. The company also said it plans to hire and source locally, responding to community concerns about the environmental impact of large data centers. The data center industry’s water consumption has drawn scrutiny from regulators and environmental groups, according to reporting by The Wall Street Journal, as AI computing demands intensify.

The results come at a difficult moment for the AI investment thesis. Rising interest rates, reinforced by Tuesday’s hot inflation report, are making debt more expensive for companies building AI infrastructure. Voters passed ballot measures in several states last week that could slow the data center buildout. And the public market has grown skeptical of the AI trade, concerned that spending will outpace revenue for years.

What I think

The $3.7 billion loss on power generation equipment is the number that matters. SoftBank paid in advance to secure turbines and transformers, and then changed its plans. That is not a write-down of a bad investment. It is a write-down of a bad plan. SoftBank bet that it could buy its way to the front of the line for power equipment, and the line moved.

The OpenAI stake is the reason anyone owns SoftBank. $54.6 billion invested, $99.6 billion in fair value, $45 billion in unrealized gain. If OpenAI’s valuation keeps climbing, SoftBank’s losses on data centers and Vision Fund portfolio companies do not matter. If it does not, they do. The entire company is a bet on OpenAI, financed with debt that is getting more expensive as interest rates rise.

The stock rising 13.9% on a $7 billion loss tells you what the market thinks. The market thinks the loss is noise and the OpenAI stake is signal. The market may be right. But the market thought the same thing about WeWork in 2019, and about the Vision Fund in 2021, and about every other SoftBank bet that looked like a stroke of genius until it did not. Masayoshi Son has made more money than anyone in Japan by making bets that looked crazy and turned out to be right. He has also lost more money than anyone in Japan by making bets that looked crazy and turned out to be wrong. The AI buildout is the biggest bet he has ever made, and it is too early to know which kind it is.