Brief Breakdown: Sony Group Corp (NYSE: SONY)
In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.
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Sony Group Corporation, commonly known as Sony, designs, develops, produces, and sells electronic equipment, instruments, and devices for consumers, professionals, and industrial markets. Sony is known for its televisions and PlayStation gaming consoles, but it also produces music (largest music publisher and second largest record label), movies (third largest film studio), video games, and other visual products. Sony is a “jack of all trades” as it also offers Internet broadband network services, provides life and non-life insurance, banking, and various other services. As of this writing, Sony is the largest technology and media conglomerate in Japan.
At the time of this writing (1/2/2022), SONY is trading at $126.40 with a 52 week range of $91.75 - $128.30 and a market cap of $156.7B. In Q2 of 2021, SONY’s sales increased by 13% year-over-year (it is denominated in Yen on their quarterly reports so we will just be reporting percent change) with their largest sales increase in game and network services up 138.8% with the release of the PlayStation 5. Return of equity (ROE: Net Income / Total Equity *100) of SONY is 14.49% and net margin (net income / revenue) is 9.47%. The debt to equities ratio (total liabilities / total equity) is 3.05. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view SONY’s last quarterly earnings here and 2020 annual report here. Below we have percent returns denominated in both USD and in Bitcoin.
Sony is a media and tech giant that is well-recognized globally, particularly for its televisions and gaming systems. Sony owns 55% of the market share in the image sensor market, is the largest manufacturer of image sensors, the second largest camera manufacturer, is among the leaders in semiconductor sales, the world’s largest player in the premium TV market, and is one of the largest players in the music industry. Sony is extremely diversified in the technology industry and is one of the largest media conglomerates in Japan. Sony is one of two or three main players in the video game console industry, along with Microsoft and Nintendo. Sony seems primed to continue their dominance in the tech industry in 2022.
Here are three points to support the bullish thesis:
Diversity of Income: Sony has various sectors of its business with a focus on technology that allows them to be well-suited for any type of macroeconomic situation. Sony excels in music production, televisions, microchips, cameras, video games, movie production, and much much more. This reliance on multiple sectors and products allows for growth in multiple areas and simply put, preparation for anything to go wrong in any sector. If for some reason Sony’s next video game console flops, it has other products and services to fall back on. I personally like diversity of products, especially for large cap companies like Sony, because a lot needs to go wrong for Sony to fail.
Subscription Earnings from Video Games: The subscription model has increased in popularity across all industries. Companies have realized the power of having consistent and reliable revenue monthly. Sony has millions of monthly users on its video game platform and is utilizing their large customer base to profit monthly. Users seemingly have no choice to pay for their service as it allows for online game play which is extremely popular among the video game community. The two main players, Microsoft and Sony, control this market and it will allow for them to control the price of the subscriptions going forward.
Increase in Video Game Popularity: According to WePC, the video gaming industry is worth $178.73 billion which is a 14.4% increase from 2020. Even with countries opening up in 2021, video games are still increasing in popularity at a rapid rate. A prediction in 2016 had the video game industry valued at $90.07 billion and the industry has blown those predictions out of the water. The video game industry keeps increasing and does not seem to be stopped and Sony being an industry leader has it primed for more and more growth in this sector of their business. Predictions have historically been well below the actual growth of the video game industry, so it will be interesting to see if the growth of the industry will continue at a rapid rate going forward.
Here are three points to support the bearish thesis:
Stiff competition: It’s no surprise that Sony faces competition - every “tech” company is currently swimming in shark-infested waters. In the gaming industry alone, Sony faces tough competition from other video game giants, including Microsoft (Xbox) and Nintendo (Switch). In the music industry, they’re competing against Universal Music Group and Warner Music Group. In general electronics, they must compete with Phillips, Panasonic, Samsung, and Lucky-Goldstar (LG). While Sony has thus far been successful against their competition, it’s important they don’t rest on their laurels and continue to develop and distribute state of the art products.
Continued supply chain disruptions: Sony debuted the Playstation 5 - their newest iteration on one of the most popular gaming consoles in human history - in November of 2020. Supplies quickly sold out, leaving many customers stuck playing the PS4. And, unfortunately for Sony, the supply-demand mismatch hasn’t cleared. Like many other electronics companies, Sony has struggled with ongoing supply chain issues, which have forced them to scale back their expected production of the PS5 (they now expect 15 million by March, downgraded from 16 million). Fortunately for Sony, many other companies have experienced the same issues. However, if their competitors can alleviate supply chain issues before Sony does, some potential PS5 consumers may jump ship to Microsoft or Nintendo.
Reduced consumer spending: In the seemingly likely scenario that global markets correct downward throughout 2022, consumers may be less likely to buy unnecessary goods (e.g., new televisions, gaming systems, etc.). Throughout 2020 and 2021, economic shutdowns and government stimulus checks left many consumers with excess cash. Anecdotally, I know many people who used that excess cash to purchase unneeded electronics - without this “spare” spending cash, I’m not sure they would have bought these goods.In the U.S., savings rates have returned to pre-pandemic levels and other pandemic-related programs are likely coming to an end. For example, student loan interest rates are set to return in May (although, to be fair, this has been pushed back twice). As we come out of the last two years of pandemic madness, inflation, low savings, and generally low consumer sentiment may make customers less willing to purchase Sony products.
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Have a great week everyone,
Brandon & Daniel
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.