SoftBank's Investment in OpenAI Risks Valuation Pitfall—Prepare for a Potential Rally or a 19% Decline

Jefferies Downgrades SoftBank: Concerns Over OpenAI Exposure

SoftBank recently faced a downgrade from Jefferies, which shifted its rating to Underperform. The primary reason cited was SoftBank’s substantial and growing financial involvement with OpenAI, which has raised significant doubts about the reliability of SoftBank’s reported valuations. Jefferies’ analysts argue that SoftBank’s heavy investment in OpenAI has likely led to an overstatement of its own portfolio’s net asset value. Notably, SoftBank is estimated to have contributed approximately $3 billion annually for rights tied to Japan and about 85% of the capital OpenAI has raised in recent funding rounds. This dominant financial role has fueled dramatic increases in OpenAI’s valuation—from $150 billion up to $840 billion—while simultaneously inflating SoftBank’s own reported net asset value.

Jefferies’ Price Target and Conditional Outlook

Jefferies set a new price target for SoftBank at ¥3140, suggesting a potential 19% decline from current trading levels. However, this outlook could shift if OpenAI either goes public at a valuation higher than its latest private funding or secures a major investment from sources other than SoftBank. The future direction of SoftBank’s stock is now closely tied to the outcome of OpenAI’s next funding round or a possible IPO, making the company’s valuation highly dependent on a single, high-stakes investment.

Financial Interconnections: Related-Party Deals and Leverage

Jefferies’ concerns about SoftBank’s valuation are grounded in the complex financial relationships between SoftBank and its portfolio companies. Two major related-party transactions stand out: SoftBank’s annual payments to OpenAI, which represent about 15% of OpenAI’s reported December revenue, and a $200 million payment to Arm Holdings, accounting for roughly 16% of Arm’s quarterly revenue. These internal transfers are not typical market transactions; instead, they serve to artificially enhance the reported financial performance of SoftBank’s investments, creating a feedback loop that boosts SoftBank’s own portfolio valuations. Jefferies warns that this self-reinforcing mechanism is unsustainable and forms the basis of what they call a “valuation trap.”

Competitive pressures are also mounting. OpenAI’s leadership in artificial intelligence is being challenged by rivals such as Google’s Gemini and Anthropic’s Claude, both of which are achieving similar results in benchmark tests. In the enterprise software sector, Anthropic is gaining traction, and Microsoft has recently chosen to partner with Anthropic over OpenAI. If OpenAI’s competitive edge continues to erode, the value of SoftBank’s investment—and its reported net asset value—could become increasingly uncertain.

Profitability Concerns and Credit Risks

Jefferies also highlighted OpenAI’s deteriorating financials, noting a loss of around $12 billion in the third quarter of 2025, which suggests an annualized cash burn exceeding $50 billion. This high rate of spending, combined with uncertainty about future external funding, increases the risk to SoftBank’s credit profile. In March, S&P Global Ratings revised SoftBank’s outlook to negative, citing the company’s additional $30 billion commitment to OpenAI and the potential strain on its financial flexibility. While related-party transactions may temporarily boost reported revenues, they do little to address the underlying cash flow challenges or the intensifying competition.

Valuation Gaps and Market Sentiment

Despite the downgrade, SoftBank’s share price has remained relatively stable, hovering around $11.12. However, a closer look reveals a significant disconnect in valuation. The stock trades at a price-to-earnings ratio of 6.62 based on trailing earnings, indicating that investors are factoring in considerable operational risks or doubts about future growth. With a market capitalization of $126.7 billion, the market appears to be heavily discounting SoftBank’s reported net asset value, a gap that Jefferies attributes to inflated valuations driven by internal transactions and concentrated investments.

Market sentiment remains cautious, with a one-year target price of $9.27—below the current trading price—reflecting widespread skepticism. While some analysts have offered optimistic views, the prevailing outlook is bearish. The opportunity for tactical gains depends on whether the market overreacts to the downgrade, but the underlying risk is that the valuation trap is real and the low P/E ratio accurately reflects the fragility of SoftBank’s business model.

Key Triggers to Watch

• A public listing for OpenAI at a valuation higher than its most recent private rounds could immediately validate SoftBank’s reported net asset value.
• Significant new investment in OpenAI from parties other than SoftBank would help diversify funding sources and reduce valuation distortions.
• Uncertainty remains around rumored external commitments, such as a possible $100 billion investment from Middle Eastern investors, which could alter the risk landscape.

In summary, Jefferies’ downgrade has created a scenario where SoftBank’s stock performance is closely tied to OpenAI’s next major funding event or a potential IPO. The current valuation gap may present a trading opportunity if the market overreacts, but the fundamental risk remains that SoftBank’s valuation is artificially inflated and vulnerable to a correction. Investors should closely monitor developments related to OpenAI’s funding and public listing prospects, as these will be decisive in determining whether the projected downside materializes or serves as a support level for the stock.