SNE – Sony Stock Should Ditch TVs, Not Just PCs

by Dan Burrows | February 5, 2014 1:30 pm

After more than a year of unfruitful efforts, Sony (SNE[1]) is finally getting out of the PC business. Unfortunately, anyone holding Sony stock needs the company to do a lot more than jettison this money-losing division to make SNE worth holding again.

[2]Sony will sell its unprofitable Vaio PC business to a Japanese investment fund, according to reports[3]. Whether this is a good start or too little too late remains to be seen.

After all, Sony stock will still be hampered by the unsold overseas Vaio business, since the deal only covers Japan. Furthermore, the price of $490 million for the PC division is immaterial to SNE beyond knee-jerk trading on the news.

Besides, what the heck took Sony so long?

PCs have been a highly competitive, low-margin business for a decade or more. That’s why IBM (IBM[4]) got out of the game by selling its own PC business to Lenovo (LNVGY[5]) 10 years ago (which is when Sony should have dumped PCs.)

But it didn’t, and SNE has been paying the price. Margins are so tight in PCs that the route to profitability is volume. But the PC market shrank a record 10% last year amid the rising popularity of smartphones and tablets. And Sony has less than 2% of the market, anyway.

Add it all up and Sony stock had to contend with a PC business that analysts estimate will lose $300 million to $400 million in the most recent fiscal year. As much as the market can say good riddance to Vaio, the future of SNE lies with what the company can create — not cut. But that picture is tied to TVs, and the outlook there is cloudy at best.

Consumer Electronics Are a Loser for Sony Stock

Dumping PCs to focus on TVs and smartphones might make sense on paper, but it’s hardly a slam-dunk that TVs and smartphones are businesses worth competing in. Like PCs, prices have come down so much that TVs are another low-margin business, with customers responding to marketing and cost much more than innovation.

Sony, which positions itself as a premium brand, is never going to compete with Samsung (SSNLF[6]) or LG on price. It’s actually a testament to the Sony brand that it grabs more than 10% of the TV manufacturing market. (Although that’s less than half of what market-leader Samsung commands.)

But margin-expansion isn’t going to happen, and neither is volume growth, so what does this business really do for Sony stock over the longer term? Only continue to weigh it down. Sony’s TV business has lost $7.5 billion over the last decade.

Smartphones are a consumer electronics market where Sony should be able to better compete, but it probably needs the market leader — Samsung again — to stumble. Smartphone brands and models are sticky. HTC makes what is generally regarded as one of the best Android smartphones[7], but it’s gone nowhere because Samsung has become the default purchase for that platform. Waiting for the competition to mess up isn’t much a business plan.

Investors in Sony stock will get a better idea of how the company is doing and where it’s headed when it reports results Thursday. But it’s a strong bet that profits will be driven by the company’s financial services and music business. Consumer electronics will once again post an operating loss.

SNE shareholders can only hope that Sony dumping PCs is only the beginning. Sony stock would be a much better bet if the company would get out of consumer electronics entirely.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2014/02/sne-sony-stock-vaio-xperia/

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