SoftBank's Stock Surges 146% Driving Topix Index Growth

SoftBank Group, a prominent player in the Japanese stock market, has seen its weight in the benchmark index surge, compelling even skeptical investors to buy into the stock. The company's founder's significant bets on artificial intelligence have driven its stock price to surge by 146% since the start of the fiscal year in April, making it one of the top-performing stocks in the Topix index. Concurrently, SoftBank's weight in the index has doubled to 2%, trailing only behind blue-chip stocks like Toyota Motor and Sony Group.

Despite concerns over SoftBank's volatility and complex business model, fund managers are finding it necessary to hold the stock to outperform the market. The chief investment officer of a prominent investment firm noted that institutional investors are grappling with how to handle SoftBank. The officer stated that without holding this specific stock, all efforts to select other high-quality investments would be in vain.

Since late March, SoftBank's market capitalization has increased by 15.9 trillion yen (approximately 110 billion USD), contributing nearly 10% to the Topix index's market capitalization growth. The second-largest contributor to the index's market capitalization growth, Advantest and Mitsubishi Heavy Industries, provided market capitalization increases that were less than half of SoftBank's contribution.

Investors are becoming increasingly aware that SoftBank's stake in OpenAI will significantly influence its valuation. OpenAI's substantial spending plans have already driven up the prices of U.S. tech stocks like Broadcom and Oracle. The growth of OpenAI is remarkable, and the applications of AI are becoming ubiquitous. Confidence in OpenAI's large orders should be evident.

However, it is important to note that SoftBank's stock price tends to perform exceptionally well during market upswings but is more susceptible to downturns. Its beta coefficient, which measures volatility relative to the overall market, is the highest among the top 100 companies in Japan, at 1.515. This indicates that its volatility is 1.5 times that of the index.

Currently, SoftBank's stock is trading at a discount of approximately 20% to its net asset value, the narrowest gap in recent years. This has led to market speculation that SoftBank's stock price could stall once investment sentiment weakens.

However, the founder's latest significant expenditures, including a 30 billion USD reinvestment in the Stargate AI project in collaboration with OpenAI and an unexpected 2 billion USD bet on Intel, are fostering new optimism. An analyst from a prominent securities firm predicts that this discount will disappear as the Vision Fund's investments improve risk reduction and the AI chip plan progresses. The analyst has twice raised the target stock price for SoftBank in less than a month, anticipating that the NAV discount will shrink to 0%.

Meanwhile, the chief investment officer of a prominent investment firm suggests that as some investors continue to bring their underweight positions back in line with the benchmark, SoftBank's stock price could accelerate. The officer noted that when a high-weight stock like SoftBank continues to rise, it becomes difficult to square your underweight position. This is a structural issue with benchmark-linked investing. We may see a self-reinforcing cycle where additional buying triggers more buying.