A disastrous start to the new year for the Japanese markets just might have been given a reprieve — and from one of the more unlikely of sources.
The much-embattled and viciously ridiculed consumer electronics giant Sony Corp (ADR) (SNE) catapulted nearly 18% to close January’s final day of trading, a byproduct of an impressive earnings beat. But after years of teasing investors with ultimately futile promises of a recovery, does this massive leap finally signal the turnaround for Sony stock?
SNE Stock by the Numbers
On surface level, the technical performance was truly an epic masterpiece.
In 2015, Sony stock returned around 20%, a solid result in and of itself. But to achieve this in one day? That’s penny stock-like madness! In fact, there’s only been two times in Sony’s history that SNE has moved higher in a single session — in Oct. 13, 2008, when Sony stock posted a reactionary move of 18%, and in Feb. 5, 1975, when shares jumped an all-time record of 21%.
Of course, in the latter’s case, the Japanese markets were in the early stages of what would later become one of the most terrifyingly awesome financial bubbles of the modern era. Back then, Sony chairman Akio Morita fostered a spirit of monozukuri, a dedication to manufacturing excellence. It was partly through this near-obsessive pursuit that Sony radically changed the pop-culture landscape with the introduction of the Walkman in 1979.
But with great success often comes an even greater challenge. A series of missteps and opportunities gone begging allowed Sony’s primary competitors, Apple Inc. (AAPL) and Samsung Electronic (SSNLF), to gain a critical foothold on the emerging technologies of digitalization and cloud-based applications. The markets were equally brutal, plunging Sony stock into the abyss and necessitating a top-down restructuring plan.
A better-than-expected performance for SNE’s third quarter of fiscal year 2015 is hoped to be the catalyst for a long-in-the-tooth recovery. Earnings per share came in at 78 cents, busting open Wall Street’s consensus estimate of only 59 cents. As a result, net income jumped over 33.5% against the year-ago quarter to finish at $1 billion.
More importantly, Sony’s top brass is holding onto its full-year guidance, thus solidifying the recent confidence in SNE shares.
However, this isn’t the end all, be all for the still-embattled company. When adjusted for foreign currency fluctuations, revenue year-over-year was essentially at parity — certainly not bad, but not even close to where Sony needs to be.
How to Handle Sony Stock
For long-term Sony stockholders, the answer is remarkably simple — dump the losers!
But what some fail to appreciate is that outside of the languid consumer electronics division, SNE owns a vast network of lucrative assets. It was these business units — video games, music and movies — that saved the day in Q3. With exclusive rights to some of the hottest trends in pop culture, including singer-songwriter Adele and the James Bond franchise, it’s no wonder that activist investor Dan Loeb — who at the time had the largest stake in Sony stock — petitioned aggressively for the company to be split in two.
As has been par for the course, Sony chief executive officer Kazuo Hirai listened, but ultimately failed to take a satisfactorily decisive action. Frustrated with the lack of initiative, Loeb eventually exited his position in SNE after realizing a fairly strong profit.
But this time around, Sony can’t afford to diddle-dally. Even a blind person can see that its consumer products — outside of its business-to-business sales of image sensors — continues to bleed market share to rival competitors.
The reality is that Sony still pioneers amazing technologies but it doesn’t know how to sell them. Engaging in commoditized warfare as Loeb alluded to in his petition simply lacks logical sense, as Sony is known for quality, not quantity.
At the end of the day, the massive leap in SNE shares is a confirmation — if management dumps the dead weight, it has a chance to foster a very viable recovery. This speculation is likely the reason why SNE scored the third-biggest single-day move in its storied history.
With any luck, the painfully obvious message from the company’s Q3 earnings report will be made apparent to the top decision-makers — Sony stockholders deserve as much.
As of this writing, Josh Enomoto was long SNE stock.
