2023-05-01 15:31:58 ET
Summary
- Sony's fourth mid-range plan exceeded its initial target, thanks to the music and picture segments.
- The ET&S segment is expected to face tough competition from Samsung and Xiaomi in the TV market.
- Despite uncertainty in the macroeconomic environment, Sony has the potential for growth in the service market, making the stock a solid choice for investors.
Investment Thesis
It's not a secret that Sony Group Corporation (SONY) has an ambitious plan for its Spider-Man franchise, with plans to elevate it beyond the Avengers. With the upcoming release of Spider-Man: Across the Spider-Verse in 2023 and the exclusive launch of Spider-Man 2 on PS5, the company has demonstrated its unmatched ability to produce premium content and distribute it widely across multiple platforms, which signifies its ambition to reign supreme in the entertainment industry.
During the Q4 earnings call, management reported that its fourth mid-range plan exceeded its initial target, thanks to strong performances in the music and picture segments. Even though the environment for hardware products is challenging, we believe that Sony's diversified portfolio and significant competitive advantage in various service markets enable them to maintain momentum despite these difficult conditions. Though the management provided a cautious outlook for 2023, we remain confident that Sony is well-positioned for growth. Investing in this stock provides investors with exposure to the service sector, a solid choice in these uncertain times. The stock dropped after the earnings. We think this can be a good entry.
Company Profile
Sony Group Corporation is a multinational corporation that produces a range of electronic equipment, including mobile phones, cameras, televisions, and game hardware and software. Additionally, Sony is involved in the production and distribution of recorded music, animation titles, and motion pictures, as well as financial services.
Key Takeaways from Q4 2022 Earnings
The company released its Q4 2022 earnings on April 28, 2023. The company's cautious short-term view of a potential downturn in Europe and an ambiguous rebound in China were likely to blame for the stock's 5.7% decline after the report.
The company grew 16% in revenues and 14% in adjusted net income in 2022, driven by strong performance in the
Game & Network Services (G&NS), Music, Pictures, and Imaging & Sensing Solutions (I&SS) segments.
Progress On The Fourth Mid-Range Plan
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The fourth midrange plan's three-year cumulative adjusted EBITDA has significantly surpassed its initial plan, mainly due to the music and picture segments, with an expected ¥5 trillion, 16% higher than the target of ¥4.3 trillion.
- The company will continue investing to grow over the mid-to-long term, but is being cautious in its investment decisions in the short term, carefully assessing valuations and timing given recent changes in the market environment.
Growth Drivers
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Low Penetration And Strong Content Libraries
Sony's Pictures division is anticipated to experience an 11% rise during the fiscal year of 2023, bolstered by the launch of multiple franchise films and the robust performance of its media networks, such as Crunchyroll and the India business.
We believe that the picture segment has shown significant growth potential, specifically within the animation streaming market. With the streaming industry growing at an average rate of 35% per year, according to FilmLA , and a projected market size of $43.73 billion by 2027, the market shows no signs of slowing down. In addition, the penetration rate of steaming services continued to increase. According to Netflix , the streaming service penetration rate increased from 23% in 2021 to 34% in 2022.
Moreover, the global anime market was still in high growth mode, and it was expected to reach $43.73 billion by 2027, according to an industry report cited by the LA Times.
We believe that Sony can maintain its growth by capitalizing on the acquisition of Crunchyroll. When compared to other players in the industry, Crunchyroll has a comparatively lower market share, with a 3.5% market share in the streaming sector.
With the merger of Crunchyroll and Funimation, Sony now owns the largest specialized anime platform, which is well-positioned to benefit from the growing anime industry. Although Disney and Netflix continue to dominate the streaming market, Crunchyroll's distinctive value proposition sets it apart. Its exclusive partnerships with Sony ensure that it has access to highly coveted anime content, and its vast anime content library is second to none. Consequently, Sony has positioned itself favorably to sustain its growth in the anime market.
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Technological Advantage
Management expected its I&SS segment to grow revenue by 14% in FY 2023 due to a rise in sales of image sensors for mobile products.
We believe that Sony can maintain its position as a market leader in image sensors by continuing to innovate. According to Omdia , Sony presently commands a 44% global share of CMOS image sensors, which are essential components of smartphones made by major players such as Samsung, Apple, and Google. Although Sony's market share has declined in recent years, its formidable customer base and successful track record provide a firm foundation for sustained expansion.
Furthermore, Sony's image sensors have earned widespread admiration, and the company's latest triumph in providing image sensors for Apple's iPhone 15 models solidifies its status as a top-tier player in this market.
Risks
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Competition From Samsung And Xiaomi
The company expected its ET&S segment revenues to decline by 4% due to a weak TV and mobile market in 2023.
Inflation and macroeconomic factors can have an impact on Sony's sales in the ET&S segment. The consumer technology industry, in particular, has experienced weak sales due to post-pandemic-related needs in 2022. However, the NPD Group predicted that through 2025, TV unit sales would increase annually by the low single digits as prices declined across the board and the trend toward larger sizes accelerated.
Hence, we believe that Sony faced tough competition from Samsung and Xiaomi in the TV market. Sony competes with Samsung in the high-end TV market, but Samsung has a cost advantage due to its vertically integrated supply chain. Sony, on the other hand, has a strong R&D team and a more diversified supply chain. However, with innovation slowing down in the TV market, Sony faced a strong challenge from Samsung's cost competitiveness. Additionally, Xiaomi entered the high-end TV market with an advertising-based model, selling TVs at slightly above manufacturing costs and relying on advertising revenue or value-added services, putting pressure on Sony to lower their prices.
Valuation
Since Sony's capital structure has remained relatively stable over the past five years, we have the option to use either P/E or EV/EBITDA for valuation purposes.
Currently, Sony's P/E ratio is 16.37x, which is slightly higher than its five-year average of 14.7x. Its PEG ratio of 1.67x is significantly higher than the 0.34x five-year average, indicating the firm has greater prospective growth potential.
Compared to the median P/E ratio of its sector, Sony's P/E ratio is notably elevated. This divergence might be attributed to the company's robust growth prospects. Currently, companies with the financial resources to invest and grow are outpacing those without those resources. Sony sets itself apart from competitors with its consistent R&D investment spending and predictable capital expenditure plan.
The company has not implemented a significant share repurchase program, and there is limited opportunity for valuation multiple expansion due to the absence of initiatives to improve margins. As a result, shareholder returns will be dependent on the company's revenue growth.
Excluding the impact of the IFRS rule change, the company expected to increase its revenue by 4.8% and its EBITDA by 2.8% in 2023, driven by growth in the GN&S, Picture, and I&SS segments, offset by a decline in the ET&S segment. With the discussion of its growth drivers and downside risks above, we think the valuation is still reasonable.
Summary
The management expressed caution for 2023 due to the continued uncertainty in the macroeconomic environment. However, we believe that despite encountering headwinds in hardware sales, the company still has the potential to grow in the service market. We believe the stock's valuation is reasonable in light of the downside risks and growth-related catalysts mentioned above.
For further details see:
Sony: Growth Potential Makes The Stock A Solid Choice