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Summary
🎮 Recently announced the PlayStation 5
💰EV: $111B
📈Q1 Revenue: $18.6 B, +2.2% YoY
Sony recently revealed the new PlayStation 5 on June 11, which caught the attention of many investors. The stock has nearly doubled over the last year due to strong results from Sony's gaming business. In particular, high engagement with the PS4 has led to revenues up 2.2% YoY, amidst the COVID-19 pandemic.
While Sony is well-known for PlayStation and its gaming business, Sony Corporation is a large multi-conglomerate with seven operating segments across gaming, consumer and professional electronics, entertainment, music, media, and financial services. While Sony Music and Sony Pictures suffered drops in revenue in the last few months due to COVID, Sony's Gaming segment has shown recent growth via its PlayStation Plus (PS Plus) premium network subscription service. In today’s post, we look at Sony’s various business units and their opportunities for growth.
Did you know?
Sony was known for its Walkman brand of portable media player in the 1980s and became ubiquitous throughout the world, selling over 50 million units in the first 10 years. Its portable and solidary nature encouraged people to exercise, and led to a 30% increase in walking/running. It eventually sold over 186 million units after 20 years.
Another fun fact: The stock was first listed on the Tokyo Stock Exchange in December 1958, and on the NYSE in 1970.
Fundamentals
EV: JYP 9,985 billion
EV/EBITDA: 11.2x
Revenue Growth (Q1’FY20): 2.2%
How Sony Makes Money
As such a large conglomerate, Sony makes money in a variety of ways.
Game & Network Services (G&NS) - one of the most important, growing businesses for Sony. While previously known for its hardware and sales of physical software, Playstation has invested in its digital software, including sales of first-party titles, licensing royalties from third-party game software sales companies, and network revenues.
Music - Sony Music Group is one of the “Big Three” record companies, followed by Universal Music Group and Warner Music Group. It generates its revenues from digital distribution and sales of physical media are shared with artists and other partners. In fact, its music publishing division Sony/ATV is the largest music publisher. Counting Beyonce, The Chainsmokers, Alicia Keys, and more as its artists, most of the investment here is in continuing to discover and developing talent.
Pictures - Sony Pictures produces, acquires, and distributes movie and television, like Spider-Man, Ghostbusters, and more. Motion pictures generate near to long-term revenue from digital distribution and television licensing in addition to box office revenue.
Electronics Products & Solutions (EP&S) - EP&S is in charge of Sony TVs, audio & video equipment, cameras, and more. This group in particular pursues a strategy that places priority on profitability over sales volume, with TVs being the largest % of FY19 revenue, then audio & video equipment, mobile phones, and a small percentage of R&D efforts being focused on Autonomous Vehicle development.
Imaging & Sensing Solutions - To the average retail investor, many don’t know that Sony creates image sensors used in mobile phones and cameras, and is a dominant player in this category at 49.1% market share (its main competitor as Samsung). This group is on a solid growth trajectory underpinned by its technological prowess in CMOS image sensors and the increased demand for better cameras on mobile phones.
Financial Services - Sony Life is an insurance company in Japan that provides life insurance. Sony's Q1 results showed a 33% revenue increase, which was quietly also a reason Sony was able to report higher earnings growth. However, it isn’t guaranteed to continue, as new policy acquisitions will drop if Sony struggles to keep up with costs.
Growth opportunities
PlayStation Collections. Sony launched Collections, which allows PlayStation Plus subscribers ($9.99/month) to play old PlayStation 4 games on PlayStation 5. We think this could increase the lifetime value of its gamers. Instead of buying old games from GameStop or borrowing from friends, gamers could sign up for Collections and get access to a large set of popular old games. Currently there are 41 million Plus subscribers, which represents 37% of total PlayStation 4 install base. An additional 20 million subscribers would yield JYP 250 billion, or 3% incremental growth from the last fiscal year.
PlayStation Digital. This year Sony launched a disc-less version of the PlayStation for the first time for $100 less than the disc version. This will likely appeal to new gamers and expand PlayStation’s market opportunity. However, it is difficult to estimate how many people will buy the digital version. They’ve placed a heavy emphasis on growing its Direct-to-Consumer e-commerce business.
More Cameras on Phones. Sony manufacturer camera sensors within its Imaging Sensing & Solutions segment. Today, phones are adding 2, 3, or even 4 cameras. For example, the iPhone 11 Pro comes with 3 cameras. These technologies trickling down to entry-level phones will be supportive of the sensor demand in the next few years.
Competitors / Risks
PlayStation 5. Will the new PlayStation 5 become a hit? According to Bloomberg News, there are rumors of production issues that would reduce total units by 4 million to 11 million for this fiscal year, which ends May 2021. Sony denied this rumor. Nevertheless, Sony needs to put on their A-game, as the competition for gaming consoles is fierce this holiday season, with Microsoft launching a similarly priced Xbox One and a lower priced Xbox S. Facebook also announced Oculus Quest 2.
COVID-19. COVID-19 has disrupted supply chains for each of the other business lines, although the company, such live event cancellations, theatre closures and generally lower demand. We could see a risk of a second wave in the winter, which could negatively affect Sony this fiscal year.
Key Questions to Ask Yourself (before we think you should buy...)
Will the new PlayStation 5 become a hit? We’ve previously covered Nintendo and seen the rise of Animal Crossing and the Nintendo Switch in the beginning of COVID...
Can its growing gaming division continue to hold up the declining performance across other verticals like music & entertainment?
Our Take
We think Sony is a solid buy at the current valuation, and would recommend a position for investors interested in the latest development in the gaming industry.
Note this is not investment advice. Please consider doing your own research before making any investments!
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