Sony Corp (ADR) (NYSE:SNE) (TYO:6758) was restructured in 2014 by selling off non-profitable segments such as their Vaio personal computers. They are now focusing on high growth areas such as artificial intelligence (AI), augmented reality (AR), virtual reality (VR), robotics, and healthcare. Sony has spectacularly returned to profit in Q1 2017, delivering a net profit of US $250m, and appear to be making a comeback.
Sony Corp (ADR) (NYSE:SNE) (TYO:6758) Stock To Continue To Gain
Sony Corp (ADR) (NYSE:SNE) (TYO:6758) is a global diversified consumer electronics and entertainment company. Sony is best known for their gaming products (playstation), their consumer electronics and home entertainment systems, their smartphones and cameras, Sony music, and Sony pictures (film studio). The company was founded by Akio Morita and Masaru Ibuka on May 7, 1946 and is headquartered in Tokyo, Japan.
Sony chart – 2000-2017
The chart below shows Sony investors have had a terrible run; however the stock price started to recover after the 2014 restructure.
Mobile Communications and Game & Network Services – Provides the production, acquisition and distribution of motion pictures & television programming, and the operation of television & digital networks.
Products & Solutions, Home Entertainment & Sound, Device, Movie and Music – Provides the development, production, manufacture and distribution of recorded music, and the management & licensing of the words and music of songs.
Financial Services and Others – Is engaged in the various financial services businesses which include life and non-life insurance operations, through its Japanese insurance subsidiaries and banking operations through a Japanese Internet-based banking subsidiary.
Financial Segments, revenue breakup, and YoY change
We can see from the table below that in 2016 Sony was still a mixed bag. The bad areas included mobile communications (smartphones) due to excess competition. Sony plans to return to profitability here, by selling only to the profitable global regions.
Sony’s 2017 revenue breakup by segment and geography
Virtual Reality headset sales to boom
AR and VR headsets are becoming increasingly popular and the new must have trendy item. Sony is a market leader in this area. In Q1 2017, Sony sold 429,000 AR/VR headsets taking an 18.8% market share (second only to Samsung with 489,500 units sold for a 21.5% market share).
Sony PlayStation VR headset
Some AR and VR headset forecasts:
- IDC forecasts – “Worldwide AR and VR headset shipments are expected to see a compound annual growth rate (CAGR) of 108.3% over 2015-2020.”
- Tractica forecasts – “More than 200 million consumer virtual reality head-mounted displays (HMDs) will be sold worldwide by 2020. The company forecasts that consumer virtual reality hardware and content revenue will increase from $108.8 million in 2014 to $21.8 billion worldwide by 2020, with a compound annual growth rate (CAGR) of 142%.”
- An IDC report from March 2017, predicts the amount of shipped AR and VR headsets will reach 99.4M units by 2021, up nearly 10-fold from the 10.1 million units shipped in 2016.
If Sony can maintain a 18.8% market share, that would mean by 2020, they could be selling close to 20m AR/VR headsets (up from around 1m in the past year), which will certainly significantly boost Sony’s profits.
CEO Kazuo Hirai said recently that he expects Sony’s operating profit to reach Y500b (~US$4.5b) for fiscal year ending Mar 2018. Consensus analysts’ estimates are forecasting Y288b, suggesting we may soon see analysts upgrading their forecasts if Sony can deliver.
- In June, 2017, Sony announced it is releasing the first title from a new unit focusing on smartphone games, initially targeting Japan where its PlayStation 4 has lagged behind. Popular playstation games such as “Everybody’s Golf” will soon be available as a phone app for free download on various smartphones including the Apple (NASDAQ:AAPL) iPhone.
- AR and VR headsets are becoming increasingly popular and the new must have trendy item. Sony is a market leader in this area. With increasing VR headset sales come increasing games sales. PlayStation VR owners have already bought 5.25m games.
Sony’s main competitors include the gaming companies and the consumer electronics and smartphone companies such as Microsoft (NASDAQ:MSFT), Panasonic (OTCMKTS:PCRFY), Sharp (OTCMKTS:SHCAY), LG Electronics (KRX:066575), and Samsung (OTCMKTS:SSNLF).
Sony forward PE
Assuming Sony estimates are met which seems very likely as they are well below the CEO’s guidance, then Sony is currently at fair value on a forward PE of 18.0. If Sony is able to deliver CEO Kazuo Hirai’s Y500b forecast then the 2018 PE will drop towards 10, making Sony a bargain. For this to happen unprofitable segments must be axed, and PlayStation 4 and PlayStation VR headsets have to boom. Both of these are looking quite realistic.
Sony came to fame in the past with several category killers such as the Sony Walkman, and the Sony PlayStation. This may well happen again with the Sony PlayStation virtual reality headsets.
Sony is already a leader in gaming, and the VR headsets are a new product with huge potential sales upside to both gamers and non-gamers, which should mean Sony can achieve strong revenue increases. Combine this with management’s strict plan to cut unprofitable segments and this should lead to a strong rebound in profits as we already saw in Q1, 2017.
Sony is fairly valued right now, and should be on investor’s radar if they are bullish on the gaming and VR areas. I rate them as accumulate, especially if we see more positive signs that the VR is booming.