Slowly but steadily, SoftBank is making its way back into the center stage of the artificial intelligence arena, a move expected ever since Masayoshi Son, the group's founder, declared a two-year shift from a defensive posture to an aggressive one focused on AI advancementsRecently, at the start of the year, Son unveiled an ambitious AI infrastructure project dubbed "Star Gate" with a staggering budget of $500 billion, flanked by significant figures such as Sam Altman, CEO of OpenAI, and Larry Ellison, chairman of Oracle.

While Son was not present at the latest earnings call on February 12, the buzz revolved primarily around SoftBank's collaboration with OpenAICFO Yoshimoto Goto expressed optimism amidst the challenges, "Many are questioning what Masayoshi is doingBut I believe this quarter, we will clarify and convey the message they want to share," he remarked, indicating the interconnectedness and mutual reliance between SoftBank and OpenAI in shaping their collaborative future.

Despite lofty ambitions, SoftBank’s recent financial data for the third quarter ending December 31, 2024, is far from idealThe company reported a staggering net loss of 369.17 billion yen (approximately $2.39 billion), a severe drop contrasting sharply against analyst expectations of a profit of 234 billion yen, and a year-over-year profit of 950 billion yenThis downturn raises eyebrows about the sustainability of SoftBank's aggressive strategy, especially as its Vision Fund, the flagship investment division, also registered losses of 352.75 billion yen, a stark shift from profitable outcomes in previous quarters.

The grim numbers are attributed to the plummeting valuations of listed companies like South Korean e-commerce firm Coupang and China's Didi ChuxingThese losses juxtaposed with the company’s significant foray into AI present a complex picture, balancing risk with potential rewardsYet, with such considerable stakes on the line, the public and investors are naturally apprehensive.

SoftBank’s newest initiative within the AI domain, "Star Gate," is being hailed by the new U.S. administration as the largest AI infrastructure initiative ever attempted, promising substantial investment spread across both immediate allocations and structured timelines

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With plans to channel $500 billion into this sector over the next four years, and an initial injection of $100 billion, the structure puts Son at the helm of this joint venture, with SoftBank managing financial aspects while OpenAI oversees operational componentsOracle and MGX are also significant shareholders in the initiative.

However, skepticism regarding the viability of "Star Gate" surged immediately following its announcement, particularly from notable technology entrepreneur Elon Musk, who criticized the venture’s financial robustness, citing evidence suggesting that the funds SoftBank claimed to have raised fell significantly short of the projected $10 billion.

In the wake of such criticism, Goto addressed Musk’s comments during the earnings call, stating, “I’ve seen Elon’s reactions, yet I don't believe any emotional outbursts yield positive results." Goto emphasized that the $500 billion figure serves as an ambitious albeit preliminary watermark for their plansHe insisted that SoftBank is not intending to raise hundreds of trillions of yen via asset or cash sales; rather, it aims to partner with lenders and equity investors to facilitate the project.

According to Goto, the "Star Gate" initiative will encompass a variety of data centers and energy projects situated across different geographical locations, each having a tailored financing structureSuch structures would likely vary in equity stakes and thresholds required from investorsSoftBank is working on a model of "project financing" that could cater to diverse investor needs and standards, exploring financial instruments like preferred shares, senior bank loans, and mezzanine financing options. “We will engage global investors based on each financing tierSome may aim for higher returns despite taking on risks, while others might prefer safer, albeit stable, yields,” said Goto, underscoring the adaptability of SoftBank’s investment strategy.

Emphasizing a pragmatic approach, he highlighted that the funding SoftBank needs would encompass only a fractional equity percentage ranging between 10-20%, distributed among the four partners involved

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Overall, the cash requirements are not expected to be exorbitantly high, especially with SoftBank reporting liquid assets amounting to 5 trillion yen (approximately $32.4 billion) as of the end of December.

Bloomberg’s senior credit analyst Sharon Chen previously analyzed the implications of such a project financing model, suggesting that should 10% of the $100 billion joint venture expenses be equity financing, SoftBank's effective investment could dwindle to under $5 billion, thereby considerably reducing the need to liquidate assets for capitalProjections estimate that SoftBank’s overall investment in "Star Gate" could tally between $15 billion to $20 billion, distributed over a four-year timeline.

Nevertheless, challenges loom large over SoftBank's ambitious plans, notably as rival companies like DeepSeek have begun attracting investor interest shortly after the "Star Gate" announcement, potentially undermining SoftBank’s estimated valuation and prompting a re-evaluation of the massive projectGoto noted that the emergence of DeepSeek is drawing attention due to its novelty, yet expressed confidence in OpenAI as a partner, remarking on the potential difficulties for competitors to catch up.

In the backdrop of these developments, reports indicate intensified collaboration between SoftBank and OpenAI, with news surfacing that SoftBank is on the verge of concluding a monumental $40 billion investment in OpenAIA portion of this capital is earmarked for "Star Gate," a move poised to elevate OpenAI’s valuation above $300 billion while enabling SoftBank to become the largest stakeholder, surpassing MicrosoftWhen directly questioned about the financing developments, Goto remained circumspect, stating, “I’m hesitant to comment on such speculations.”

Additionally, in light of Musk's recent proposal to acquire OpenAI's non-profit branch for $97.4 billion, Goto mentioned the plausibility of such scenarios arising but deemed them largely speculative at this stage, unable to comment on how they might affect the "Star Gate" initiative directly.

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