Sony
(SNE, $110.70): “No need to console, Sony is on a roll.”
By: Ciara
Jones, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently
holds this position. This article was written by myself, and it expresses only my
own opinions. I am not receiving compensation for this article, and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
- Sony (SNE) designs,
produces, and sells electronic equipment, software, and devices, as well as
motion pictures and music worldwide. Their portfolio consists of five
reportable segments: Game & Network Services (26% of revenues), Music
(16%), Pictures (8%), Electronic Products & Solutions (10%) and Financial
Services (14%).
- With 177.7 million monthly gamers in the US this year, more than half of the US population will identify as a digital gamer by the end of 2021.
- Sony’s Game & Network Services continues to be a front-runner of growth with 1Q21 sales up +16% on a 2-year CAGR.
- Sony indicated it would continue to expand its content business through acquisitions with over $18B USD planned over the next three years on strategic investments to expand subscribers for its gaming.
- Despite production headwinds, CFO Hiroki Totoki announced in 1Q21 that they had secured enough chips to achieve their PS5 production target.
Key points:
The narrative of gamers being young,
tech-savvy males has shifted with the built-in social component of gaming
options attracting a wider range of players during the pandemic. With 177.7
million monthly gamers in the US this year, more than half of the US population
will identify as a digital gamer by the end of 2021. With the US accounting for
23.9% of their revenues, Sony has capitalized on the growth in the gaming
demand in the US and abroad. Sony has put up impressive growth in their game
& networks services on a 2-year basis with $8.2B USD sales in FY20 up +38%
YoY and despite growth in gaming beginning to plateau, Sony’s 1Q21 gaming sales
were up +10% YoY. One element that will remain important for gaming companies
in FY21 will be their ability to provide a social interaction in a virtual way.
Despite Facebook appearing to be the leader in the build out of the metaverse,
Sony has positioned itself well to be a top competitor. Sony’s PlayStation VR
headset is the single bestselling VR headset of all time, positioning them well
ahead of their competitor Microsoft who has yet to include VR features in their
Xbox.
As Sony streamlines its consumer
electronics business, it continues to strengthen its entertainment content and
distribution business. Recent acquisitions include animation business
Crunchyroll ($1.2B Market Cap) with 3 million subscribers and Finish software
maker Housemarque. Sony indicated it would continue to expand its content
business through acquisitions with over $18B USD planned over the next three
years on strategic investments to expand subscribers for its gaming and
entertainment services.
Despite tailwinds coming from the growing pandemic demand for
its devices and content, Sony has noted concerns surrounding the semiconductor market
shortage with supply-chain constraints affecting production of consumer
electronic devices. In May, Sony announced they expected to sell 14.8 million
PS5 units this FY21 with a price tag of US$500. Despite production headwinds, CFO
Hiroki Totoki announced in 1Q21 that they had secured enough chips to achieve
the production target.
What has the stock done lately?
Investors were worried about difficult comps for 1Q21, but
Sony blew past expectations and delivered impressive numbers again. Sony
reported $26.5B USD in sales up +34% YoY. Sony also raised its guidance from
$84B USD to $89B USD. After a strong 1Q21 earnings, Sony’s stock has performed
well over the last month demonstrating a +11.8% return.
Past Year Performance:
Over the past 52 weeks, the price range for Sony was $72.45 to $118.50. Sony experienced their 52-week high in February after raising its full-year profit outlook during their 3Q20 earnings call and releasing 4.5 million sales in PS5 consoles during the holiday quarter.
My Takeaway:
Sony
was pitched on October 30th, 2020 with an initial price target of $104.69. The
current price of the stock is $110.70, a +63% return from when it was
originally pitched. The original drivers for the investment including
PlayStation 5's release, technology integration in the smart phone market, and the
build-out of Sony Financial Holdings continue to be applicable to Sony’s
long-term growth story. PS5 outsold PS4 in their first fiscal year on sales
with more than 10 million PS5 consoles sold to date. If Sony follows their
normal cadence of releases, consumers can expect a Slim PS5 by 2023, which will
support their gaming momentum, which is up +16% on a 2-year CAGR. After strong
1Q21, The Street maintains a “Buy” recommendation with a price target of
$138.03. It is recommended that the portfolio maintains the position in Sony as
it continues to perform in line with the investment thesis and continues to invest
in the social component build-out of their gaming systems.
