2023-06-14 11:04:19 ET
Summary
- The Apple Vision spatial computing headset can boost Sony's growth due to the company's advanced imaging and sensing solutions used in devices like Apple's headset.
- Sony's gaming segment, including its PS VR2, is expected to grow alongside Apple's VR gaming market, while Sony Pictures may benefit from a shift in public preference towards animated works.
- Despite near-term challenges in the gaming segment, Sony's future prospects appear bright, making it a strong buy for 2023.
I believe that The Apple Vision, the “spatial computing” headset made by Apple ( AAPL ), can be a great catalyst for Sony ( SONY ). With Apple pushing the headset category, I believe Sony can take advantage of this exponential growth. While challenges and competition exist, Sony's diverse portfolio and strong management position are favorable for future growth. With an undervalued stock and ample upside potential, Sony remains a compelling investment opportunity in 2023.
The Future is Cameras and Sensors
Currently, around 10-15% of Sony’s revenue comes from imaging and sensing solutions. Sony’s LiDAR and cameras are standard in the majority of digital devices consumers use, including Apple and Samsung. Get this, the new Apple Vision Pro includes 12 cameras and 5 sensors . Remember when people were mocking the iPhone with 4 cameras?
Greek City Times
You see where I’m going with this. Not many mention it, but Sony has some of the most advanced sensing solutions available. Even Samsung ( OTCPK:SSNLF ), which has the ability to manufacture camera lenses, uses some Sony sensors for the Galaxy S23 Ultra . Sony sensors are a part of most mobile devices on the market, and the spatial computing category will help take it to a whole new level.
VR is not a new thing, it has existed for over a decade. However, it was more of a proof-of-concept. Even when Meta ( META ) switched its business completely to move toward a “metaverse” direction, there were doubts surrounding AR/VR/Mixed Reality. In a podcast between Lex Fridman and Mark Zuckerberg, Mark Zuckerberg commented that " I do think that this is a certain level of validation for the category where we were the primary folks out there before saying, hey, I think that this virtual reality, augmented reality, mixed reality, this is going to be a big part of the next computing platform." Now, the biggest company in the world is betting on the future of computing, the concept has been proven.
It doesn’t matter whether Apple or Meta or whatever company wins the VR/AR race, Sony will benefit as it makes the basic, necessary components. In fact, Sony recently bought land near its image sensor factory in Kumamoto prefecture, which I believe is for Sony to be prepared for a surge in the sensor demand.
In my last article , I mentioned that VR gaming is set to grow at 14% CAGR for the next 7 years, but I now expect it to be much greater. Apple’s partnership with Unity ( U ) shows Apple’s bet on VR gaming. We can only wait for what types of games developers will come up with, if successful, VR gaming may even surpass the growth of mobile gaming.
the exponential mobile gaming revenue growth (Data.ai)
Don’t misunderstand me, the Vision Pro at $3500 will not become the new best-selling device, but it serves as a great proof of concept. Many of my doubts about the headset category were erased after the Vision Pro. For example, a lot of people experience nausea and dizziness when wearing VR or AR headsets. According to the numerous 30-min reviews , there is significantly less nausea on the Vision Pro. This means it may be feasible in the future to wear a headset for the majority of the day, however dystopian that may sound. The Vision may very well be the next iPhone.
PS Will Be Fine
Sony is expanding its gaming channel, its biggest revenue driver, into iCloud and VR gaming. For this article, I will only talk about the VR gaming section, as it became an area of concern after the Vision Pro. Michael Pachter stated that he thought that Sony was most at risk after the WWDC event.
While I agree that Vision Pro will lead gaming to a new height, I do not think Sony’s PS VR2 and the Vision Pro compete in the same market. The Vision Pro is meant to become a daily device like the iPhone, where users can do both productive and recreational tasks. PS VR2 is only a gaming device, like the Nintendo Switch, not a daily driver. This can be seen reflected in the price as well, as the VR2 retails at $550, significantly less than Vision Pro. If anything, the Vision Pro should only push the advancement of headsets. Apple taking away most shares of the VR gaming market does not mean it is stealing from Sony’s shares, in fact, I expect Sony to place a stronger emphasis on its VR series in the future as people become more customed to wearing a headset.
Don’t Forget Sony Pictures
I have to applaud Sony for its contributions to the new Spider-Verse movie. Across the Spider-Verse once again took animations to new heights and I enjoyed the movie a lot. Yes, there are some exciting works in production like Gran Turismo, I believe it is the animated sector that will lead Sony Pictures to new heights.
Spider-Verse scored the second-highest opening weekend of the year , at $120.5 million, only behind The Super Mario Bros Movie. Perhaps this shows a shifting trend and preference for animated works. It wasn’t like other movies were bad, the two animated movies outperformed motion pictures including Avatar, Black Panther, Creed, and Little Mermaid. If this is, in fact, a sign of a shifting public preference, Sony and Disney ( DIS ) would be the winners while studios like Paramount Pictures ( PARA ) will take a hit.
Sony owns many anime studios like Crunchyroll, Funimation, and Aniplex. Currently, they produce and distribute seasonal airing animated series, but it wouldn’t be a difficult transition to capitalize on the box office.
UNF Spinnaker
Risks
While there is exciting news for the imaging sensor and picture segments, the gaming segment may be a challenge in the near term. For this business year, Sony forecasts a 3.2% profit decline due to a “ slow recovery in profitability in the videogame unit ”. The company expects to sell 25 million units for the year, which is record-breaking.
The slightly disappointing outlook is easy to overlook as Sony comes off its most-profitable year. Another potential risk is the competition across all segments it operates in.
For example, the Xbox has been a competitor for the PlayStation. Even though the PS consistently outsold the Xbox, Xbox still puts pressure on Sony to keep investing in PlayStation to keep the competitive edge. Microsoft's Activision Blizzard acquisition shows that Microsoft ( MSFT ) still cares a lot about its gaming. Even in cloud gaming, the two company trades blow for blow as Sony offers PlayStation Plus while Microsoft focuses on its GamePass.
Another example is Samsung in imaging sensors. While Apple uses Sony sensors, phones like the Google ( GOOGL ) Pixel uses Samsung sensors. A large part of Sony's imaging sensor success is having Apple as its customer, but if Sony loses its edge, Apple could easily switch to Samsung sensors or even make its own sensors, just as they are moving away from Samsung and LG-made displays .
Even though operating in so many segments can be seen as a safe bet on the market as a whole, it requires supreme management across all fronts to keep its competitive edge.
Valuation
For my new updated valuation, I used the current WACC of 6.5%. For my growth rate, I chose to use consensus EPS estimates and average it out. I increased my terminal growth rate for Sony by 0.5% compared to last time because of my stronger forecasted growth in the image sensing, gaming, and pictures categories.
author's own calculations (excel)
Using these assumptions, my intrinsic value per share for Sony is at $142.4, giving it above a 40% upside.
Using peer comparisons, I want to compare Sony to Microsoft. Both of these companies operate in diversified segments, with gaming and hardware being the more important revenue driver for Sony while software and service are the main revenue driver for Microsoft. Sony is trading at 17.4x P/E ((TTM)) and Microsoft is trading at 35.9x P/E. However, a large part of this is thanks to people's optimistic views on AI and how that benefits Microsoft's potential service revenue. Thus, I will use the pre-ChatGPT and Bing integration announcement, or December of last year, for the price of Microsoft, which traded at around 26x P/E. Nevertheless, it still appears Sony is undervalued compared to this peer.
In the end, I think there are still huge upsides to the stock, and the company remains undervalued.
Conclusion
Sony remains my bet for 2023. I believe the new Apple Vision is an exciting catalyst for the PS VR series. As headsets become increasingly prominent, Sony’s Imaging Sensing Solutions will see greater demand. In addition, I expect Sony Pictures to perform well, thus, Sony remains a strong buy.
For further details see:
Sony: Apple Vision Creates Potential For Growth