Read Us And Find Out If It Is a Good Idea to Invest in Sony
This is a Japanese company with business interests in games, entertainment, consumer electronics, semiconductors, and financial services.
The Business
Sony’s revenue has been resilient [FY 21 (Mar.): +9%] despite the impact of Covid-19, with growth from Gaming (+34%), Financials (+28%), and Music (+11%) offsetting declines elsewhere. We forecast revenue growth of 5% in FY 22 and 10% in FY 23. Limited chip supply will drag Gaming’s revenue growth to <10% in FY 21 in our estimate, but we highlight PS5’s continued demand strength, with the console consistently being out of stock since its release. This bodes well for its high-margin gaming software business (60% of Gaming revenue). We project mid-single-digit sales growth for Semiconductor, Pictures, and Music in FY 22 and FY 23. We see slight operating profit (OP) margin contraction to 9.8% in FY 21 (FY 21: 10.6%) as the ongoing chip shortage (i) increases Sony’s component cost; and (ii) weakens Gaming operating leverage due to the limited PS5 production. However, we forecast OP margin rebounding to a record high of 10.8% in FY 22 on assuming normalizing chip supply and PS5 production, higher revenue mix of digital games, and stabilizing OP for Semiconductor on market share gains (FY 21: -38%).
Sony’s current strategy largely involves these three initiatives: (i) to improve content-based products (gaming, video, or audio); (ii) to drive better hardware brand to connect content from creators to users (audio/video equipment and systems); and (iii) to maintain its number one position in CMOS image sensor products. Sony highlighted that initiatives (i) and (ii) will help to sustain its cash flow, while initiative (iii) will help it to capture the growing market of high-level image capturing applications.
Investment Case
Our Buy Opinion corresponds to the solid balance sheet (net cash and short-term investments was 10% of assets at end FY 21), unique products, and shifting earnings dynamics towards content creation are its key positive qualities. We see PS5 hardware and software driving earnings growth over the next five years, supported by its robust platform, PS-exclusive games, and >50% market share for consoles. Slow production of music, movies, and TV series due to the pandemic is likely to persist, but the negative earnings impact will be largely offset by lower marketing costs and increased mix of digital sales. Risks to our call include slow production of PS5 games resulting in lower-than-expected PS5 hardware and software sales, stronger-thanexpected competition from game streaming services, and insufficient capacity for Sony’s sensor products.
Our 12-month target price is $ 117 , which is equivalent to P/E of 17x. The implied valuation is lower to its 5-year average P/E of 18x. We expect Sony to rerate positively in line with its changing business model towards content-creation and platform businesses (from hardware production).
Our risk assessment is Medium. Reflects favorable longer-term prospects for the film businesses and SONY’s strong balance sheet, offset by likely continued challenges for the consumer electronics business, as well as increased competition.
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