[Stock-Analysis] SONY (TYO:6758,NYSE: SONY]: A Dying Tech-Whale or a Forgotten Tech-Titan?
TL;DR
Sony might be best known for its Walkman and PlayStation, but it is in fact a massive conglomerate with businesses in entertainment, Sony Pictures, electronic components, such as CMOS image sensors and LED crystals, and even a financial sector in form of Sony Life Insurance and Sony Bank.
In 2014, Sony reported deficits of 120 billion yen. Since then, the company has pulled off a V-shaped recovery with net income exceeding 900 billion yen. This is mainly because PlayStation 4 sales have been incredible, an increased demand for image sensors (CMOS), and that financial sectors such as Sony Bank and Sony Life are growing.
Sony’s P/E ratio the past five years is is about 13x to 15x, and due to the recent downturn in the market it’s at 15.9x, but it was 24x just 3 months ago. Compared to its main competitors its high (Panasonic: 9x, Hitachi: 12x, Mitsubishi Electric: 11x).
Sony’s dividend yield is very low at 0.38%, but it has more than doubled from 20 yen in 2017 to 55 yen in 2021.
My Stock Recommendation [Sell/Wait/Buy]: Wait
Low dividend yield
Competition in the field of electronic components is fierce
The stock price trades at a premium compared to its peers due to the "Sony brand" image. However, in both CMOS sensors and finance, this brand holds less value
The stock price has soared recently for unclear reasons and are now being suppressed due to an overall bearish market for tech stocks.
PlayStation is extremely profitable for Sony, but as cloud-gaming is growing, with companies like Apple, Google, Meta, and Microsoft at the helm, Sony’s weak track-record on cloud services might hamper its gaming segment growth.
You can buy the stock on the Tokyo Stock Exchange (TSE) with the ticker 6758, or on the New York Stock Exchange (NYSE) with the ticker SONY
Overview
Sony is a fascinating company for value investors because on the one hand it’s constantly going through turmoil, fluctuating sales and everchanging strategic directions; on the other hand it's consistently delivering profits and long-term value with a relatively cheap stock price.
Sony is a tech-titan that has likely shaped your life in one way or another. The company is not only limited to electronics, but is acting in a wide range of fields, including entertainment, games, and finance.
In 2014, Sony reported huge deficits of 120 billion yen and the stock tanked. Since then, the company has pulled off a magnificent V-shaped recovery with net income exceeding 900 billion yen. The recent business performance has also been excellent and in December 2021, the stock price temporarily exceeded 15,000 yen, setting a new record high.
This is due to a stellar business performance in gaming and electronics, which is its main business, is improving, supported by the strong performance from its financial arm (more on that later).
Will this momentum continue in the future?
In this article, we will analyze Sony's stock price and business performance, and whether future stock prices can be expected in the long term .
What is Sony?
Sony is perhaps the best known electronics manufacturer from Japan.
The company’s most famous products include include the Walkman, PlayStation, the Handycam video-camera, VAIO PC, the AIBO robot dogs, etc.
Sony may have a image as an electronics company, but its business is much more diverse.
Sony is in fact a massive conglomerate with industries such as entertainment represented, Sony Pictures, electronic components such as CMOS image sensors and LED crystals, and even a financial sector in form of Sony Life Insurance (one of the biggest insurance companies in Japan) and Sony Bank.
Since the 2000s, Sony’s electronics division has fallen behind China and Taiwan, as well as the US (mainly Apple), and its business performance has deteriorated significantly, resulting in a deficit of 120 billion yen in 2014 .
Sony used to be the strongest electronics brand in the world! Many experts point out that Sony could have become Apple (Steve Jobs did in fact bring Apple’s design philosophy directly from Sony) if it played its cards better, but sadly this is just theory at this point.
What is Sony's stock price?
Let's take a look at the stock price data (as of June 13, 2022).
The standard for P/E ratio the past five years is about 13 to 15 times, and due to the recent downturn in the market it’s at 15.9, but it was 24 just 3 months ago.
If you compare it with the P/E of others in the same industry:
Panasonic: 11.7x
Hitachi: 14.7x
Mitsubishi Electric: 13.3x
Sony's P/E ratio is at a relatively high level.
Although the stock price is definitely still in the range to be considered a value-investment, Sony has a higher P/E than other companies in the same industry. However, this is fair as it is a more prestigious brand and it has shown a remarkable recovery of business performance.
Even though Sony's performance has recovered sharply in the past years, all Japanese manufacturing is exposed to fierce global competition.
What is Sony's dividend record?
Next, let's look at the dividend record. Below are the actual dividends from Sony.
The dividend payout ratio in 2020 is 9.5% and the dividend yield is 0.38%, so the dividend is definitely on the smaller side.
Although the dividend yield is very low, the dividend has more than doubled from 20 yen in 2017 to 55 yen in 2021.
Except for 2015, when no dividend was paid, dividend has increased 4% to 35% every year in the past five years.
Since Sony’s the main income source is in the manufacturing industry, there is competition with manufacturers in the US, Taiwan, and China; the sales in the electronics sector are not stable. Hence, even though the trend indicates that dividend is increasing, we cannot expect stable dividends.
What is Sony's stock price trend?
Here we will look at long-term charts and short-term charts for the past 10 years.
Sony 10-year stock performance
Below is a stock-price chart for the last 10 years:
Looking at this chart, you can feel the strength of the Sony brand. At the end of 2021, it temporarily exceeded 15,000 yen, setting a new record high.
As previously said, business performance fell into losses in 2014, but stock price has still grown steadily over the past 10-years.
Sony's one-year short-term chart
Below is Sony's stock price from July 2021 to July 2022.
In January 2020, the stock price exceeded 8,000 yen and reached a record high, but Sony's stock price also plummeted in the short term due to the stock market plunge due to Covid-19.
However, since its low-point right when Covid-19 hit, the stock-price has gone from 5297 yen on March 13, to temporarily exceeded the 15,000 yen mark (last seen in December 2009).
It has been flat since 2022, but it is keeping the 12,000 yen mark.
What is Sony's business performance?
Next, let's take a look at Sony's achievements. The two charts show the changes in revenue, operating income, and profits over the past 10 years (unit: million yen).
It wasn't until 2017 that the business performance recovered in earnest after entering a period of stagnation such as a decrease in sales between 2014-2016.
The company has done an impressive V-shaped recovery, where net income has increased from -120 billion yen to 900 billion yen in fiscal 2018.
Major factors behind Sony's recovery in business performance:
PlayStation 4 sales have been incredible
Increased demand for image sensors (CMOS)
Financial segments such as Sony Bank and Sony Life are growing
The main reason for Sony’s turnaround is that PlayStation 4 has sold above all expectations, but the company also holds a 50% market share of the CMOS sensor installed in the smartphone cameras. This is an incredibly profitable business that competition is still lagging behind in.
The trend for smartphones to be equipped with high-performance cameras is growing, so demand for Sony CMOS sensors is likely to continue increasing. On top of this, these sensors are used for autonomous driving and face recognition which are still small markets but are growing rapidly.
Furthermore, the financial sector accounts for two-thirds of Sony's assets. These segments have smaller profits but give a great buffer if the electronics field runs into a deficit.
Upward revision of business results for the fiscal year ending March 2010 three times
Sony's business performance has been excellent since 2021.
Operating income, which indicates the profit of the main business in the fiscal year ending March 2022, increased 26% from the previous fiscal year to 1.2 trillion yen, which is 160 billion yen higher than initially forecasted.
Sony’s CEO Kenichiro Yoshida had this to say about the results “We have succeeded in our strategies centered on subscriptions such as music, movies, and games, and we are steadily increasing profits without being greatly affected by changes in the business environment. We will likely see even higher profits in the coming years”.
Sony's stock is showing an upwards trend, but is it worth buying?
Sony's stock has had a remarkable journey in the past 10-years, gaining more than a 1000%! Question is, will this rally continue?
The company has shown an incredible ability to pivot away from competition heavy sectors by expanding its financial arm, and there is huge potential growth for its top-of-the-line CMOS sensors. However, I would wait before buying this stock.
To put it simply, the reasons are:
The dividend yield is too low for a company that is not a growth company. This is likely due to the fluctuating sales of electronics, which makes high dividends hard to sustain.
Demand for image sensors such as CMOS is growing exponentially now, but even if Sony holds a lead in this segment now, it seems likely that cheaper competitors will catch up.
In addition, The Sony PlayStation is doing well (PS5 is also finally picking up steam), but IT giants such as Google, Apple, Meta and Microsoft have all announced that they will enter the cloud-based game market. Sony has shown severe weakness in cloud based gaming and might not be able to lead/follow in this sector. With that said, the company has shown to be a leader in the space in getting exclusive title, both for its gaming and movie studios, which will likely make them relevant without the best online platform for many years to come.
However, the stock price has lost a lot of value without any reasonable explanation. This is likely due to the overall negative sentiment towards tech stocks.
Hi, Thanks for the article. Can you also please comment on the huge debt of Sony?