Summary
- Sony is well-positioned in several markets.
- Delivered solid Q3 performance even without blockbuster movies.
- Price target of $140. Strong buy.
Thesis
The pandemic has greatly affected the market as a whole, especially international companies such as Sony ( SONY ). However, with the end of problems attributed to quarantine (such as supply chain) in sight, it is time to reconsider these companies. With an impressive portfolio and exciting prospects, I believe Sony is a sure bet to beat the market. To me, Sony is a strong buy with a PT of $140.
Introduction & Financials
Sony, headquartered in Minato City in Tokyo, provides audio and visual electronics and information technology for companies, consumers, and professionals. Sony operates in so many fields, from research to production to hardware to software, it is difficult to give an overview of all its products and services. I made a pie chart based on their forecasted sales for the fiscal year ending on March 31, 2023.
SONY revenue by sectors (meta-chart)
This should give a decent idea of how each category weighs for Sony financially and provide a better idea about how Sony is positioned overall.
Before we look at their products and services, I’ll run a quick re-cap of their quarter 3 , which ended on December 2022. Their revenue came in at 25,007 Million USD, which missed the expected amount by around 5% but represented a 13% increase YoY. Their net earnings came in at $2,407 Million, a decrease of 5.6% YoY. This can be attributed to an 86% decrease in profit from the pictures category. This was not unexpected since Q3 2021 featured Spider-Man: No Way Home and Venom: Let There Be Carnage , which was big box office hits. There was also a decrease in the number of customers for financial services compared to 2021.
Growth
Even though the company operates in a wide range of franchises, Sony has proved itself to provide high-quality products across the board.
G&NS
PlayStation
Game & Network Service has long been a major portion of Sony’s revenue. Within it, the most significant part of the revenue comes from software titles and add-on content provided by Sony Interactive Entertainment. This means the digital downloads of the games and their additional features, accounted for about 50% of total GN&S revenue in 2021 and 45% in 2022. While it is important for Sony to have attractive games their users can constantly buy, getting games optimized for PlayStation has never been a problem since they have one of the highest gaming user bases. The revenue depends on the quality of the AAA games and the gaming market. Overall, I would expect their revenue from digital software & add-on content to increase steadily and gradually for years to come.
The main reason GN&S revenue increased significantly is the PlayStation sales increase. The PS5 continues to have no problem finding huge demand, and Sony appears to have ramped up production in Q3, selling 7.1 million units just in this quarter. This was the result of a successful battle with the supply chain , and for the first time, ps5 is expected to be widely available in retail stores.
In my opinion, a really exciting prospect for Sony is the VR gaming market. Just recently, the PS VR2 headset was released. Although Sony had to decrease its shipments due to disappointing pre-order numbers aggressively, it still received high praise from reviewers for its state-of-the-art display and responsiveness.
PS VR2 (PlayStation)
Currently, some of the biggest limitations of VR gaming are the hardware and appeal. Even with one of the best VR headsets the market can offer, it fails to deliver the life-like experience so long promised. Also, even with the number of games Sony plans for the VR2, it’s mainly already-popular VR games or variations of popular console games.
Users cannot justify a $550 purchase when they get dizzy after a 30-minute gaming session or play games that probably provide a better experience on the PS5. On the bright side, VR gaming is expected to have a CAGR of 14% over the next 7 years. And with the impressive hardware Sony developed, I fully expect them to be at the forefront of VR gaming.
VR Gaming forecast (Grand View Research)
It’s an exciting time for the world of gaming, and GN&S will continue playing a major role for Sony.
Pictures
In the 9 months ending on December 31, Sony Pictures’ operating profit decreased by around 50% compared to 2021. This embodies the high-risk, high-reward nature of the film industry.
I hold high expectations from Sony Pictures in the upcoming years. Sony has developed a very strong content library that includes popular films such as Spiderman , Venom , and new films like Uncharted featuring Tom Holland. For TV shows, Sony is also leading the industry, with big names like T he Last of Us . Last year, Sony racked up 37 primetime Emmy nominations and 12 wins.
A category I’m really excited about is anime. I had no idea Sony owned Aniplex (which contains studios like A-1 picture & CloverWorks) and Crunchyroll (merged with Funimation), both of the above produce/license some of the most popular animes. The Japanese animation market is expected to grow at a CAGR of 9.8% until 2030.
In the short term, revenue from pictures might fluctuate wildly as we’ve seen in this quarter. However, with Sony’s dominant position and impressive library, they should be able to navigate the competition well. In the long term, I only see upsides. Best of all, the box office hasn’t even returned to 2019 levels. Pictures will become an increasingly important source of revenue for Sony.
Global box office is yet to recover (Marketing charts)
ET&S, Imaging & Sensing Solutions, music
I don’t think ET&S needs much explaining. It’s the hardware sold to consumers and includes televisions, headphones, speakers, video, etc. This is a very broad category, but Sony has found success across all of these platforms. Their cameras, headphones, TV, and speakers are all considered some of the top competitors in their respective categories. They have impressive performances and are loved by both higher-end consumers and professionals. Sony should continue receiving a stable chain of revenue from this category.
Much lies the same for Sensing Solutions. If you’re reading this article on a smartphone, there is a big chance your phone’s camera sensor is manufactured by Sony. Sony provides sensing & solutions to basically all of the top phone companies, including Apple, Samsung, and many more. Of course, there are many other devices that need camera sensors. Whether it’s cars or VR devices, they need Sony’s camera and LiDAR sensors. The image & sensing solutions are expected to grow at 8% CAGR until 2023. And since Sony is the leader here, they should take full advantage of this growth.
Lastly, I will touch on Sony’s role in the recording and distribution of music. Sony Music features some of the biggest artists, like Meghan Trainor and Bob Dylan. Sony is also trying to increase support for independent artists through AWAL. Every time you open up Spotify, it is likely you listen to songs licensed/produced by Sony. In the past years, Sony Music’s revenue has increased steadily and surely. I don’t see major catalysts that can significantly affect Sony’s dominant position in music.
Sony Music revenue over the years (Statista)
Other & new markets
In addition, Sony also has financial services that provide insurance and banking products. This segment is dependent on both demand and the market. While it is possible Sony’s name will attract some users, the market overall has almost filled with a forecasted CAGR of only 3% in Japan. The gains and losses from investments held by Sony will be difficult to predict, but overall, this sector should generate a stable stream of money.
Lastly, Sony is constantly looking to expand to newer segments, such as phones and automobiles. The phone was a failure, critiqued for its inferior software. They also unveiled their concept car, Vision S , and announced a joint venture with Honda ( HMC ), their car is set to go on sale in 2026.
While these endeavors are certainly exciting, I will exclude them in my valuation, as it is difficult to judge their chance of success. However, it is good to keep these catalysts in mind.
Valuation
In Yahoo Finance, 5 analysts set price targets for Sony with a low of $102 and a high of $149.4.
Analysts' price target (Yahoo Finance)
Sony’s PE ratio is around $15 at the time of writing, well below the average for S&P 500, which is around $30.74. And as we saw, Sony has many exciting prospects which make the $15 PE too low.
As for my own evaluation, I used Sony’s current WACC (weighted average cost of capital) for the discount rate and kept it constant. I forecast a growth of 6% for the next 5 years, and a terminal growth rate of 4%. I think this estimate is quite conservative considering Sony is a company constantly looking to expand into new markets. I would place Sony's PT at $140.
Author's own DCF calculation (Excel)
Risks
As a result of operating in so many markets, Sony has lots of competitors. Their biggest competitor perhaps is Microsoft ( MSFT ), which also operates in the GN&S space. For example, in January, after Microsoft’s announcement on the acquisition of Activision Blizzard, Sony’s stock dropped by a staggering 13%. However, I don’t believe Sony’s dominant position in the industry will change even in the long term. Since PS4, the PlayStations have consistently outsold Xbox, and it makes sense why Microsoft has committed so desperately to its Game Pass service. Sony has continued to show commitment to its gaming services, one of the biggest sources of revenue. Last July, Sony completed the acquisition of Bungie Inc, an independent video game developer in the US. Sony has proven it can navigate all types of competition really well, and any competitor will have a difficult time nudging the dominant position Sony has built across all its markets.
A bigger concern is the market as a whole. For example, the gaming segment may face difficult times ahead as C ovid tailwinds disappear. Or the decreasing growth of smartphone sales will affect Sony’s imaging & sensing segment. Or the inflation causes consumers to decrease spending on Sony’s entertainment products. However, there are some upsides as well. For one, the box office is expected to recover to the 2019 levels. And Sony might feel more comfortable expanding into new segments, providing more sources of revenue.
Finally, the Japanese Yen is the weakest it’s been in years. This might hurt investor confidence in the Japanese monopoly, as all is said and done, the stock price is decided by the market. It will affect Sony’s debt levels by increasing interest rates, but I see these as short-term problems that are largely dependent on politics/fiscal policies.
Japanese Yen shows weakness (Trading Economics)
Overall, while there are short-term risks involved, I don’t see any catalysts that will hurt its position in the long run. Regardless, $83 is an attractive price point and investors should feel comfortable going in.
Conclusion
Last but not least, Sony has prevailed in numerous markets and continued to provide business growth even under tough economic headwinds. I believe it is very much undervalued and has a PT of $140. Even with the foreseeable risks, I still think Sony stock is a strong buy.
For further details see:
Sony: My Bet For 2023