SoftBank's AI Ambitions Face Challenge from DeepSeek

Introduction

SoftBank Group Corp.'s (SFTBY) pursuit of artificial intelligence (AI) dominance has encountered a significant obstacle: DeepSeek, a low-cost AI model. As SoftBank embarks on a massive $500 billion fundraising for its Stargate Project, DeepSeek raises questions about the necessity of such substantial investment.

Stargate Project and DeepSeek's Challenge

SoftBank's Stargate Project aims to establish a leading position in AI infrastructure development in the United States. However, DeepSeek's emergence has sparked concerns about the cost-effectiveness of massive datacenter investments for AI.

Analysts suggest that DeepSeek could trigger a "near-term market correction" for SoftBank and other AI stocks. Industry experts emphasize the need for monetization, which may take years to materialize.

Financial Impact and Bearish Sentiment

Recent investment losses have pushed SoftBank into a loss-making quarter. Analysts' earnings forecasts have decreased by approximately 25% since November 2022. Short interest in SoftBank shares has increased to around 3.8% of the free float, indicating growing bearishness.

DeepSeek's Implications for Stargate

DeepSeek's low-cost AI model highlights the possibility that AI development may not require as much datacenter power as previously believed. This raises concerns about the potential financial burden for SoftBank, which will shoulder a significant portion of the Stargate investment.

The financing requirements for Stargate may also limit stock buybacks, a strategy SoftBank has often used to support its share price.

Analysts' Outlook and Arm's Role

Despite the challenges, some analysts remain bullish on SoftBank due to its majority stake in Arm Holdings Plc (ARM), a leader in AI chip design. Arm's strong performance has driven SoftBank's stock higher in the past.

However, Arm's high valuation multiples raise concerns about its future growth potential.

Conclusion

SoftBank's AI ambitions are facing a significant challenge from DeepSeek. The low-cost AI model raises questions about the necessity of massive datacenter investments. Financial concerns and growing short interest add to the bearishness surrounding SoftBank's stock. While analysts acknowledge the potential of Arm Holdings, the company's limited free float and high valuation may limit its upside potential. The realization of profits from AI remains a key factor in SoftBank's recovery prospects.