What the SoftBank Sale of Nvidia Stake Really Means

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Nvidia Corp. (NASDAQ: NVDA) just lost a serious long-time backer. Japan’s SoftBank Group released its year-end earnings, and the nearly $100 billion investment fund disclosed that it sold its entire 4.9% stake in Nvidia. While some investors might be alarmed, SoftBank locked in gains of roughly $3.3 billion on its $700 million investment.

Nvidia shares effectively have been cut in half from its peak in 2018, but that was after exponential gains in the prior two years. Nvidia was right in SoftBank’s wheelhouse, considering its role in graphics, artificial intelligence, machine learning, autonomous vehicle systems, servers and so on.

One issue to consider here is that Nvidia’s revenue warning in January was even worse than its prior warning. This sent shareholders scrambling, but so far many of the key long-time holders have stuck with the company for its long-term opportunities.

Masayoshi Son, SoftBank’s founding CEO, used collar and hedging transactions shown in the earnings presentation. The company appears to have been able to make $1.7 billion off of margin loans and another $500 million that was backed out of the overall cost for another $500 million to get that net cost down to just $700 million. SoftBank’s raw investment cost was listed as $2.9 billion from August 2017.

This derivatives structure, the collar transactions, act to lock in upside and prevent downside risk. This allowed SoftBank to sell for roughly $218.00 per share, versus the $105.00 or so that was paid for the stake.

While this may look like a blow to investors who wanted more cornerstone shareholders involved for years and years, the investing community may consider this a clearing out of a weaker shareholder who needs funds for distributions and other investment opportunities. As of the end of the third quarter, which was before Nvidia shares fell off the proverbial cliff, Fidelity, Vanguard and BlackRock were all larger stakeholders than SoftBank.

Nvidia shares were last seen trading up 1.2% at $151.75 on Wednesday morning. Its consensus target price is still somehow up at $227.18, and its 52-week trading range is $124.46 to $292.76.