SoftBank’s US$5.8 billion Nvidia stake sale stirs fresh AI bubble fears

[NEW YORK] SoftBank Group’s US$5.8 billion sale of its Nvidia stake jolted stock markets on Tuesday, stoking fears that the frenzy around artificial intelligence may have peaked, especially after recent warnings from Wall Street bank chiefs and a famed short seller.

In its quarterly results, the Japanese tech investor said it had sold all the 32.1 million Nvidia shares it held in October to bankroll CEO Masayoshi Son’s sweeping AI push, built around his “all in” bet on ChatGPT-creator OpenAI.

SoftBank needs the proceeds for initiatives including the US$500 billion Stargate project to expand US data-centre capacity and as much as US$40 billion funding pledged to OpenAI, whose financing details were not given with the announcements.

But the timing of its sale deepened some investor doubts that valuations in the AI industry might have gotten ahead of fundamentals.

Nvidia shares were down more than 2 per cent in early trading, weighing on the benchmark S&P 500 index.

Adding to the jitters was a revenue forecast cut from AI cloud provider CoreWeave over a contract delay that sent its stock down 9 per cent.

Drumbeats of an AI bubble grew louder in recent weeks after Morgan Stanley and Goldman Sachs CEOs warned equities could be heading to a drawdown, while hedge fund manager Michael Burry, known for shorts on the US housing market ahead of the 2008 crash, bet against Nvidia and Palantir.

Several analysts said the sale suggested Son – one of tech’s most audacious investors – sees the blistering rally that turned Nvidia into the first US$5 trillion company last month cooling after a more than 1,200 per cent surge in the past three years.

But a few of them pointed to SoftBank’s patchy record managing its Nvidia holdings. The company, by some estimates, missed out on a more than US$100 billion rally in Nvidia shares by selling it off in 2019 before the AI boom took off, only to later buy the chipmaker’s shares again.

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“As for timing, cannot say Masayoshi Son has been great with his trading of Nvidia shares,” said C J Muse, senior managing director at Cantor Fitzgerald. “It appears simply resource allocation – finding funds to make bets elsewhere.”

OpenAI focus, Son’s growing warchest

Along with the Nvidia share sale, SoftBank sold around US$9.2 billion worth of shares in T-Mobile, providing Son with a larger money chest to stamp his influence on an industry hungry for the capital and chips needed to fund the pursuit of AI technology that can match or surpass human intelligence.

“By cashing in now, he’s securing the capital needed to double down on his conviction in AI applications and the super-scaled infrastructure behind them, OpenAI, Oracle and the Stargate project,” said Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors. But the rising bet on OpenAI also ties SoftBank, which has taken massive losses on its Vision Fund investments, closer to the startup at the centre of a series of circular deals that have fuelled worries about the bubble.

The Japanese company’s stock, which has surged more than twofold this year, is getting priced more and more based on its exposure to OpenAI. The stock jumped last month on news of a sweeping OpenAI restructuring that frees the startup from its non-profit roots. The startup is considering a US$1 trillion public listing as soon as next year, which could be a big windfall for investors such as Microsoft and SoftBank, Reuters has reported.

The rising valuation of OpenAI also boosted SoftBank’s second-quarter net profit, which more than doubled.

But OpenAI has not given any clear details on how it plans to fund its AI infrastructure deals that total around US$1.4 trillion.

It expects to finish the year with US$20 billion in annual recurring revenue and recently walked back comments on need for government-backed loans.

“The Vision Fund’s checkered past certainly lends an air of high-stakes poker to this divestment,” Schulman said. REUTERS