Nvidia, Softbank announce generative AI collaboration

Jefferies Managing Director Atul Goyal joins Yahoo Finance Live to discuss Softbank's announcement of its generative AI collaboration with Nvidia, Softbank's upcoming IPO, and whether its subsidiary Arm Ltd. could be the next big AI play.

Video transcript

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BRAD SMITH: AI hype is dominating the markets. Shares of SoftBank and Nvidia popping today on news that they are collaborating on a generative AI platform. And our next guest says this could be the next big play in AI. We have Atul Goyal, who is the Jefferies managing director here. Walk us through the thesis here, why this is the next perhaps big push that we're set to see, especially from a company in Nvidia that has absolutely been making headlines and continuing to hold on to mindshare, both among some of their corporate partners but in the market as a whole within this broader thrust towards AI.

ATUL GOYAL: Thanks for having me, Brad. I want to make a distinction here very clearly that it's two different companies, SoftBank Corp, which actually announced a partnership with NVIDIA, and SoftBank Group. So SoftBank Corp did not rise yesterday. SoftBank Group went up 8%. The partnership is actually between SoftBank Corp and NVIDIA.

On the other hand, a few years back, NVIDIA was trying to acquire Arm, if you remember. That was from SoftBank, and they gave up the deal. That angle is still somewhat valid.

Now, SoftBank Group is trying to get Arm listed later this year. And while most of their product and sales are towards mobile phone devices, a certain part is for data centers, where they compete with Intel. And that's the part that they are likely to highlight and dress up as an AI play for data centers. So essentially it's a dress-up. Heading into the listing, we expect SoftBank stock to do well. But going up too fast too soon is something that we are a little worried right now. The IPO is still several months away.

JULIE HYMAN: And so do you buy their dressing up of Arm as this AI play? And I mean, I know you're not covering yet the IPO because the company hasn't come public yet. But I mean, is that something investors should be looking at?

ATUL GOYAL: So, Julie, thanks for that. There are some companies that we believe are investments. So you invest. You build a position. You might trade in and out a little bit small positions, but you invest. And then there are other stocks which you trade actively. SoftBank Group, in our view, is more of a trading stock, which you will trade in and out. There are opportunities, it gives you the short. And there are opportunities it gives you to go long at times. Currently, it's trading very close to our fair price. In late November, when it went to 7,000, it was too far high. We downgraded to sell. And once it closed to our target price, we upgraded to hold.

Now, we are waiting for the stock to catch the AI hype into the Arm. And there, we expect the stock to rally significantly. For every $10 billion of our valuation increase, SoftBank stock could rally about 15%. So we valued that at around $40 billion currently. But if, in the hype, Arm gets revalued much higher, it will give an opportunity at that time to create SoftBank at a higher level.

However, history suggests-- and this has been twice the case. SoftBank was the biggest owner of Alibaba in 2013. It was 2014, sorry. When it got listed, that was the day SoftBank stock peaked. And for many months and many years after that, it did not touch that same stock price. Same thing happened with Uber. So the risk is, going into the Arm IPO, the stock rallies a lot, but after that, it collapses. So that is what we are mindful of going into that hype. Does it make sense?

BRAD SMITH: Yeah, certainly. And so as we think about some of the biggest beneficiaries that have at least seen their own stock move as a result of the AI hype, if that hype starts to settle, and we start to see revenue be prioritized among investors, as we should, and that reattachment to the fundamentals of the business as well in tandem with some of the demand that they are seeing or at least forecasting, are there three big names that you expect to outperform, given that we've heard the chip companies are kind of that foundation of the broader totem pole, if you will, for AI?

ATUL GOYAL: So globally, our view, our view, Jefferies' view, is essentially that on the back of this investment, you're likely to see semi-cap equipment manufacturers like AMAT, like Lam Research, Tokyo Electron, ASML benefit, because besides the chase for AI-driven-- the AI hype, you also have a massive amount of support that the governments in the US and Japan and Europe are giving to these chip manufacturers to establish capacity outside of China and outside of Taiwan. And as they do that, all that money is going to go into building up equipment capacity.

So the likelihood is that these companies, other companies like AMAT, ASML, Lam Research, and Tokyo Electron could also benefit immensely as the cycle begins from here onwards. So they're already off their lows. But going next three to five years, these companies could also benefit immensely.

JULIE HYMAN: Atul, I wanted to ask you a broader question, because we have seen such an incredible climb in the Japanese market more broadly. That hasn't been true necessarily of these large cap Japanese tech stocks that you cover. In the case of SoftBank, for example, it hasn't done the same thing as the market. But I'm just curious how you're thinking about that with all the enthusiasm that there has been as of late in Japanese markets.

ATUL GOYAL: I'm really glad, Julie, you touched upon that one. It's something very unique that is happening in Japan. And it's not just about Japan creating a new high after 30 years. That's just a side story. The real story is something else. And I, for a long, while I have covered Japan stocks almost 20 years, I've been a Japan skeptic. I believe there are few good companies, great companies, and you invest in them, stay long.

However, we are at a juncture where a lot of push is happening in Japan, where there is possibility of naming and shaming if the companies do not do the right things. So collectively, thousands of companies are going in the right direction to improve the return on equity. And to do that, they have to do certain things in the right manner, collectively. I have not seen this kind of movement in two decades. And this is genuinely for the first time.

So there would be some tourist investors which will come. Japan does very well once every three, four, five years. That's always the case. But this is something more, something deeper. And what you're saying about the breadth of the market, which is very narrow in US, the breadth of the market in Japan is extremely wide. This is something really important that's happening in Japan. And I'm not sure if it's being encapsulated in the right manner, except for highlighting that yes, it's creating new highs in the indices.

JULIE HYMAN: But you're making it sound like this is a real, more profound turning point and that, if what you're saying is the case, then that would mean that those highs could perhaps be extended in the broad market there.

ATUL GOYAL: See, this is, again, the 30-year-old index high that we breached. That's not important. Across the board-- I mean, I do believe over the next one or two years, we will see new heights. The amount of money that's coming into Japan, the amount of interest that is coming into Japan is something that I have not seen for a long time. And this time for real, it's for a genuine reason. If the companies' return on equity goes up, if the companies are willing to divest non-core assets, generate cash-- Look, I cover a company, which-- it's an investment. Sony is my top pick. Even that company, while it's winning in multiple places, they recently announced they will be exiting Sony Financial Holdings. That's a non-core insurance business. They are spinning that off.

So a company that's done very well over the last, let's say, six, seven, eight years the stock is up about 7 times. It's done very well for shareholders. It's always above 15% consistently. And yet they are doing the right thing.

So it's not just one or two companies or 10 companies that are under pressure. Collectively, Japan Inc is doing a phenomenal job. And again, not enough investors are paying attention. They're only looking at the index. There is a very widespread movement that is happening. And this is something quite remarkable. I've never seen something as important because, in Japan, the carrot doesn't work that well. And the stick of naming and shaming and downgrading some of the companies from the prime section to the standard section is actually working.

BRAD SMITH: Atul Goyal, who is the Jefferies managing director-- really great insights and analysis there. Appreciate the conversation this morning. Thanks.

ATUL GOYAL: Thank you, Brad. Thank you--