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SoftBank Reveals $6.5B Loss from Uber, WeWork Turmoil (bloomberg.com)
170 points by LogicRiver 10 months ago | hide | past | favorite | 80 comments

It seems pretty clear that Softbank were badly misvaluing We and Uber. The second they hit the public markets suddenly Softbank could no longer sustain their paper valuations which is causing this loss. It's kind of funny that Softbank can mark its own homework on this - they buy the company and then because the investment isn't liquid they can basically choose any valuation they want for the companies they own. It'll be interesting to see how sceptical people are of the other companies in the Softbank portfolio. For example, they acquired ARM for $31Bn- what are they claiming it's worth now?

Arm is a de facto monopoly, WeWork and Uber are not

Exactly. ARM's intellectual property (ie. CPUs) is used in more devices than Intel.

>Softbank were badly misvaluing We and Uber.

I don't think these two really belong together. We is probably worth nothing, and even that might be generous. Uber is worth billions with the only real debate being how many billions.

If Uber never figures out how to turn a profit at scale, it'll be worth approximately $0 at some point in the future.

They expanded quickly but haven't reached profitability. Raising prices/shuting down growth still wouldn't be enough to reach that point.

If Lyft died and could raise prices perhaps as it stands now they are not worth billions because of debt/losses.

This is Monday morning quarter backing. Everyone knows We is/was worthless. But Uber,AirBnB,Slack, Tesla, Beyond Meat..all's well.

WeWork has actual real-estate assets. So, they do have some worth.

Certainly not Softbank's valuation-levels of worth, but it's still not nothing.

WeWork, for the most part, does not own actual real-estate assets. They mostly have actual real-estate liabilities - leases.

They do own a relatively small amount of property, like their partial ownership of the Lord and Taylor building, which for reference is now considered a huge mistake (it's bleeding money).

>Uber is worth billions with the only real debate being how many billions.

Assuming Uber ever turns profitable.

How can one value something fat-tailed?

$6.5B is the recognized loss, i.e., the lowest possible amount they can get away writing off on their accounting books.

The real economic loss may be much higher.

To agree with this. As someone with more of a general economic and metrics background, I was quite amazed when I first learned of the breadth of possible valuation methods IFRS (International Financial Reporting Standards) allows for. Some are pretty close to what you'd expect for the valuation of a financial instrument (after all, equity is one of those), while some are 'pretty far away'.

>I was quite amazed when I first learned of the breadth of possible valuation methods IFRS (International Financial Reporting Standards) allows for.

Think that's a bit of a misunderstanding of what's going on. IFRS doesn't deal with valuation methods per se. It's a principles driven set of standards. In this case that's "fair value". The valuation method would be driven by something like IPEV


Great link, thanks. I do think I got the jist of it right? Fundamentally, a company proposes a method and the accountant, when applicable, under IFRS, allows for the method to be used when he signs the financial report.

From my (risk management) perspective and in an environment where it's usually mark-to-market and mark-to-quite-sophisticated-model, I just had to blink a few times when I learned that things like the net assets-approach (why is that even an approach) exist. I do understand that in the cases I see there would be materially no difference for the investor (small investments, large firm) when using a more advanced approach like DCF (which still hinges on a few key assumptions).

Yeah mostly. It's a complicated area frankly.

Company, accountant, valuation committee, valuation team, investment advisor and possibly external administrator all sorta play for the same team. They collaborate to get to an approach and a number. Then the auditors roll in and check whether they think the approach is reasonable, assumptions are reasonable and calc was done right. If they don't like it they might force a change.

What's acceptable driven more by industry specific norm than anything hardcoded. So I might be looking at two similar debt contracts but do something wildly different because the one is back by real estate deeper in the structure while the other is part of a private equity structure.

Not really something an outsider can easily look into - cause it's often in the context of a interlocking web of controls - that again differ by entity/sector.

DCF - yes, though more complex isn't necessarily more accurate. In fact I dislike it because it's so easy to manipulate & difficult to call bullshit on.

>net assets-approach (why is that even an approach)

It depends on what in it basically & how those in turn were valued. Plus nature of the entity - for income/cash generating entities you do something like DCF or EBITDA peer multiple instead.

Are you allowed to switch between them at will, or is there a legal inertia that pushes you to continue reporting using the same one?

I think he's talking about the levels of fair value measurement


No anchor links on that page, so I'll just quote some snippets here:

Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date.

Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs inputs are unobservable inputs for the asset or liability. [IFRS 13:86]

Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity's own data, taking into account all information about market participant assumptions that is reasonably available.

We would need an accountant for a proper answer to that question. My perception is that they look at changes more carefully than at continuing practices and that material changes above a certain threshold need to be mentioned in the yearly report. So the effect clearly is inertia, which I would feel is a plus.

What is a "real economic loss"?

A real economic loss is a realized loss. As long as Uber and WeWork are not closed down, their future performance is hard to predict. Uber especially is not a bad company. I love them. And if you have used Uber you ask yourself, how could you have tolerated the taxi clusterfuck so long.

Sure, they're hard to predict, which is what makes Softbank's behavior here amazing. They're saying that by their own (surely optimistic) predictions, even they can't justify not declaring a loss.

As to a financial analysis of Uber, you're confusing some things. Uber did invent the summon-a-limo-with-your phone thing, so they get credit there. They didn't invent the rideshare model, but they did raise the most money to crush their competition and they were the most aggressive about committing crimes, so they currently have the biggest market share.

But all of that's ancient history. The real question for financial valuation is whether they can sustain that business once they stop burning investor money to get ahead. And I think there's good reason to believe that it will never be a particularly profitable business. Since Uber's valuation is built on being able to one day extract oligopoly rents from a large sector, it's perfectly possible that 10 years from now they'll be the next Groupon: once the new hotness, but with the stock now trading at 10% of its peak.

Of course you love Uber as a user, each ride you take is subsidized by their investors and it's generally a better experience than finding a taxi.

Why an investor would love this arrangement is not clear to me.

The real economic gain may be much larger. It’s only a realized loss if they sell now.

I bet its going to be more that SoftBanks initial investment pre "rescue".

Other investors have been saying that SoftBank has been overpaying for years. It looks like they were right and you need to discount any SoftBank valuation by about 50%.

The SoftBank playbook has an even bigger negative impact on employees. They are granted options at an inflated price. When the stock collapses (Uber, WeWork, Wag) they lose more than others because most of the comp is in equity.

As an employee, I would stay far away from any SoftBank funded company.

And, of course, they _paid_ for that comp (exercising of stock options) in cash.

You forgot improbable.

I keep thinking about Nick Leeson, the trader who caused Barings Bank to collapse.

He was highly successful with his speculative trades, but eventually things got out of hand and he was having to make bigger and bigger gambles to try to recover the lost money, until it all fell apart on him.

You can talk about being a fund with a view to 300 years of the future, but you're not going to get there if you act recklessly with the now.

Taking huge risk and huge losses would be acceptable.

But this is also a guy who fails to enforce the bare minimums for corporate governance in companies where he is the major shareholder.

It's refreshing to see that the financial Shenanigans SoftBank was playing with WeWork and even Uber backfired like that in the end.

Manipulating pre-IPO valuations as aggressively as they did was just insane.

Manipulating pre-IPO valuations as aggressively as they did was just insane

Never forget the endgame was to dump it at the inflated valuation on retail investors and pension funds. This was a heist on the scale of Madoff, if they pulled it off.

Markets were already wary since the Uber IPO was a flop. WeWork was in the same class of "We're going to become a monopoly, so invest now!!" type investments.

Like Uber, they failed to explain away the gargantuan losses. By trying to massage the financials in full view of the public, that close to the IPO was probably what killed the IPO altogether.

I fear

It's like these investors never learn that the "our unit economics are horrible, but it'll be worth it when/if we become a monopoly!" philosophy rarely plays out well.

The same industry that harps on about how disruptable old school monopolies are, is somehow buying into that? I don't get it.

I mean, the strategy has created all of the biggest winners: Amazon, Google, Facebook, Spotify, eBay, PayPal, (maybe) Airbnb, etc.

Each of them effectively monopolized something for close to a decade.

It’s not a failed proposition; it just might be harder to pull off in some spheres than others, and harder as more money gets funneled into startups, and harder as the giants jump into your newly minted market, or acquire that new market.

In the winners within your examples (I'm not sure why Spotify and Airbnb are on that list), the economics around their unit costs were fantastic, because they aren't selling physical goods or services. That's the main difference between those companies and WeWork/Uber: There's no way to drive margins low enough at those companies to justify valuing them like Google.

Side note, is a Bloomberg subscription worth it? I’m looking to get a subscription and a lot of their articles are great. Especially ones by Matt Levine.

You can get Money Stuff emailed to you daily, at about noon eastern, without any Bloomberg subscription.

> is a NEWSSITE subscription worth it? [...] a lot of their articles are great

Generally speaking, if you enjoy the content regularly enough please subscribe to newspapers and the like. News is dying or forced to deface itself to please ads and pageviews because people don't pay for quality content they like.

I’m going to try both Bloomberg’s and NYT’s trial subscriptions and see what I like. Economist wasn’t that great IMHO.

You can subscribe to his newsletter and receive them daily to your inbox. I don't think he writes any articles outside of Money Stuff.

Thanks. Bloomberg has a $1.99 3 month subscription deal. I’ll try it for a few months and see for myself.

As I few commenters are concerned about cancelling trial subscriptions at Bloomberg: I did just that earlier this year and it was rather painless. You have to submit a request through their website and wait a business day or so.

Echoing the other comment, be careful. They probably make it extremely painful to end the subscription after the trial. It once took me well over an hour to end a trial subscription to the economist.

The last trial I did was for the economist...

Pretty sure you will have hard time canceling it.

DoNotPay will help with that.

then we can say success of a fund does not correlate with its volume

Nothing was stolen. Masa handed him the first ~5 billion after a 10 minute meeting, no due diligence, no anything.

Then threw more good money after bad. And in the end ended up in a terrible position beholden to a scam artist.

But that's very different from theft. He essentially took every possible step to ensure he ended up in this position.

is this a sign of bubble popping? although I am not sure can this spread outside of Saudis and Softbank.

The last decade has seen global monetary policy create a situation where cash is very cheap (i.e. many central banks are now offering close to zero interest rates and some have actually seen negative interest rates).

That cheap cash then finds it's way into assets like stocks and housing with that cheap money putting upward pressure on those assets.

In that same climate we have seen a decade long stagnation in wages, next to zero inflation and we are now entering a stagnated and slowing global economy.

With those contradictory growth signals, the real question is how long will that cheap keep flowing, as it is the only stopping those artificial asset bubbles from popping.

Well, once you go to low interest rates, you're effectively stuck with them.

See Japan. Low interest rates make it easy to take on more national debt, so you do. If Japan's bond yields would rise even to 2% (a still ridiculously low yield) then 100% of their tax revenue would go to debt service. They'd have nothing left to spend on actually running the government.

"Stubborn" Germany refusing to take on ludicrous levels of debt they don't need to "grow Europe out of their troubles" is the only thing keeping Europe out of this situation.

Our trillion+ yearly deficits can't go on much longer until we end up in a similar situation.

It's not like the central banks can just realize their mistakes and get out of low interest rates.

As a side note -- I'm very interested in how Japanese banks have survived this. US banks usually make more money the higher the interest rate is. European banks have REALLY struggled in the low interest environment, and US banks were looking pretty bad even when interest rates were only at 1%. Does anyone know how the Japanese banks are surviving?

Add to that the global "QE" programs which are driving up equities even higher. This whole system seems to act synergistically now, perpetually driving stocks higher and higher. Will it collapse altogether (and when)? Who knows

History is full of examples of over priced bubble assets that have eventually collapsed.

So I don't think the questions is will it collapse but instead when will it collapse?

When investors want or need their capital back. Lending is so cheap right now that it probably makes mores sense to keep borrowing rather than liquidate a poor investment at a loss. So I think the equities bubble is going to continue until the lending well runs dry (which could be decades).

> "that cheap keep flowing"

Well. with ECB ending its QE program it's perhaps time to stock up some umbrellas

I don't think it is, it seems more like very easy access to capital was (mis)used in some specific cases to build very capital intensive businesses that only really scale linearly with additional capital invested (where they're supposed to scale exponentially obviously).

It's more like an inefficiency within the VC system that has been exploited and lots of money wasted, and hopefully lessons are learned. I don't think it says anything much at all about the fundamentals of the broader industry.

> is this a sign of bubble popping

no. next year. close to the US elections.

What bubble?

The one where large, mature companies are priced in multiples of revenue rather than earnings.

adam neumann should stop by saudi embassy

Please don't do this here.

You are right

Vision Fund is probably pretty dead. I can't imagine anyone giving them money in the future.

Think you'd be surprised.

One bad quarter for a guy that talks about 300 year timescale.

that's a lot of bad quarters.

In my view 300 year timescale and technology investments are antithetical.

Not if the initial thesis is correct - which I think it is in this case.

If you corner a market space that is key for future tech then it'll be very difficult for anyone else to catch up - even if tech moves forward.

Who's this guy and where his money come from? If it's based on fossil fuel revenues seized by autocrats, please explain how his plan can be sustained for centuries.

"This guy": https://en.wikipedia.org/wiki/Masayoshi_Son

> If it's based on

Not really. Son himself got most of his money from investments into Alibaba.

What you are probably referring to is that the Saudis are large investors of the vision fund. I don't share your optimism that there won't be insanely rich people with little accountability in the centuries to come.

Well if he doesn't get too fussy about investing revenues specifically from fossil fuels and diversifies into simply investing money seized by autocrats regardless of its source then it is a plan that can be sustained for millenia.

NPR Planet Money podcast recently did an episode all about it:


He's a Japanese investor. While a significant amount of the funds he invests originated from oil money, his actual investments are in technology companies, so the future revenues and valuations of his investments are not based on oil.

Vision Fund has an investment horizon in the decades. So the idea that it is dead is just ignorant.

And there is plenty of capital and not many decent investment vehicles so expect Vision Fund 2 to do just fine.

You can have an "investment horizon" of whatever arbitrary time period you want to make up but if your companies continue to lose money and continue to require additional capital raises just to operate, your "investment horizon" might get cut a bit short.

Why? Could you elaborate on this?

I don't think that FT is still a reputable company / source to quote.

How come?

They have substantial investments in ARM and NVidia which seem more reasonable...

They sold their entire stake in NVidia early this year and the total amount paled in comparison to the amount of losses/capital injections they did on WE.

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