SoftBank Is Not the Next Berkshire Hathaway

Masayoshi Son has always been ambitious. He built SoftBank Group Corp. (TSE:9984) into a telecoms juggernaut, becoming phenomenally wealthy in the process.

SoftBank’s expansive portfolio of tech investments has won Son widespread media attention. Some have even begun comparing him to Warren Buffett (Trades, Portfolio), and SoftBank to Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial).

Yet, while the eccentric Japanese billionaire’s investment strategy may bear a passing resemblance to that of the Oracle of Omaha, the similarities are ultimately superficial.

A Berkshire for tech?

The comparisons between Son and Buffett, as well as those between their respective companies, have become increasingly frequent. Sanford C. Bernstein & Co. was one of the first serious Wall Street players to entertain the notion. In a research note published in October 2017, Bernstein analyst Chris Lane made the case for SoftBank:

“We like to think of SoftBank as a tech-focused Berkshire Hathaway ... The core business [of Berkshire Hathaway] is ‘value investing,’ not insurance, SoftBank’s core business is ‘tech investing.’”

Lane pointed out that, while SoftBank’s stock has outperformed Berkshire’s over the past several years, the Japanese company continues to trade at a discount to the American conglomerate by most financial metrics. This observation led him to conclude his investor note with a thoughtful musing:

“So why don’t we hear about the sage of Tosu (Son’s hometown) or Tokyo (where he lives)? Whereas investors trust Buffett’s instincts and understand his value investing approach, they fear Masa’s big bets on the future.”

SoftBank itself has jumped on this notion, spinning the idea that its $100 billion Vision Fund, which invests in tech startups, is a sort of “mini-Berkshire” in the making. It turned to the comparison again this week as it floated the idea of taking the Vision Fund public, according to The Wall Street Journal:

“The hope is to create a smaller version of Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway Inc. — only loaded with young technology companies, many of which have yet to turn a profit, instead of a stable of well-established utilities, insurers and energy companies.”

You, sir, are no Warren Buffett (Trades, Portfolio)

It is true that both Berkshire and SoftBank are profitable operating companies whose investment activities are their real raison d'être. However, concluding this to be evidence of their fundamental similarity is wrongheaded in the extreme.

Yes, Berkshire and SoftBank are defined by their investing activities. But their respective approaches are so radically different as to dwarf all other superficial similarities. Thus, to focus merely on the fact that they both happen to be investment-focused is to fundamentally miss the point.

Warren Buffett (Trades, Portfolio) is a life-long value investor, and this is reflected in Berkshire’s strategy. Berkshire invests in profitable businesses, preferably at steep discounts. Buffett eschewed tech stocks for most of his career, though he eventually took the plunge, betting on Apple Inc. (AAPL, Financial) a few years ago. His associate portfolio investor followed that up recently with an investment in Amazon Inc. (AMZN, Financial). While far from value bargains, these tech stock investments fit Buffett’s general rule that the companies he buys be profitable.

Masayoshi Son cuts a far more colorful figure. This is reflected in his approach to investing. Through SoftBank, Son has invested in a diverse constellation of tech startups, ranging from e-commerce to dog-walking. His strategy for the Vision Fund has proven even more aggressive, making big bets on unicorn companies like WeWork. Son is evidently no more conservative when trading his own book. He reportedly lost $130 million of his personal fortune betting on bitcoin; buying in late 2017 at the height of the mania, he ended up selling after the high-flying cryptocurrency plunged by 50%.

Berkshire reflects Buffett, just as SoftBank reflects Son. But they have virtually nothing in common with each other. Berkshire spends the cash generated from its profitable operating business to invest in assets with proven earnings power. Buffett’s investments, whether in stocks or acquired businesses, are always cash-generating machines. SoftBank, by contrast, uses the cash from its profitable operating business, as well as billions of dollars raised from external investors, to buy egregiously overpriced investments in illiquid tech startups.

Verdict

It should be painfully clear at this point that Son is no Buffett. Indeed, one might even consider him a virtual antithesis of Buffett and his investing philosophy. Berkshire’s investments print cash. SoftBank’s investments incinerate cash.

Neither SoftBank, nor its Vision Fund, can justifiably be called a mini-Berkshire, let alone a “Berkshire for the 21st century.” Indeed, they inhabit utterly different investment universes.

Anyone on the lookout for the next Berkshire had best keep searching.

Disclosures: No positions.