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Sony Corp (ADR): SNE Stock Is Only for Gamblers

PS4 sales were phenomenal, but video gaming can't carry SNE indefinitely

Whether consumer electronics giant Sony Corp (ADR) (NYSE:SNE) did well or did poorly last quarter is largely a matter of perspective. But, the 8% jump in the value of SNE stock says the market is viewing last quarter as a success for the struggling company … a feat made all the more impressive by the fact that Sony stock was already up more than 25% year-to-date before the company’s numbers were released Friday morning.

SNE Stock Only For Gamblers After Post-Earnings RunupThe shocker: The lion’s share of Sony’s fiscal Q1 success came from an unexpected division, perhaps serving as an omen of the company’s looming reprioritization of its focus areas.

Sony Earnings Recap

Last quarter, Sony earned 16 cents per share of revenue of $15.66 billion. The top line missed estimates, but the bottom line obliterated the LOSS of 28 cents per share of SNE analysts were looking for.

The 800-pound gorilla in the room nobody is talking about: Despite the earnings beat, sales were down nearly 11% on a year-over-year basis, and income was 74% lower than in the first fiscal quarter of last year.

It’s not a lull investors can’t forgive and forget, at least to some degree. During the quarter, an earthquake near an image-sensor factory forced the plant to shut down, shaving an estimated 80 billion yen (about $780 million) off of its top line, leading to a 26% revenue dip for its imaging segment.

And, it’s no big secret that smartphone sales — a segment that means a great deal to Sony — are slowing down. Sony’s mobile communication arm saw a 34% year-over-year revenue decline, partially due to the smartphone headwind, and partially because the company is phasing out some of its lines in this division.

The value of the yen also worked against Sony last quarter.

The surprise winner? The revenue and subsequent profits of its video gaming efforts, which features the PlayStation console as the centerpiece.

When all was said and done, PS4 sales and game sales were collectively up 14.5% last quarter, to $3.21 billion … that translated into a profit contribution of $428.4 million (78% of last quarter’s total net income). That’s 125% more than the games division chipped in a year earlier, when it cleared a profit of only $190 million.

Looking Ahead for Sony Stock

Although smartphone image sensor sales were a victim of a natural disaster and that disruption has since been resolved, don’t look for an immediate return to the division’s glory days. Sony made it clear to SNE shareholders that its image sensor business would continue to be unimpressive through early next year. Sony doesn’t expect fireworks on that front until the latter half of 2017, and really, not until 2019, when it begins production of automotive sensors.

In the meantime, Sony is shedding its battery business, selling those assets to Murata Manufacturing so it can focus on more fruitful ventures.

One of those ventures, of course, is video games. The division’s success in the recently completed quarter may mark a resurgence of console gaming, which had been losing ground to mobile games. Downloaded digital content achieves much higher-margin revenue than sales of game-discs are able to create, and the company seems to have found a winning formula.

Given all it knows right now, Sony lowered its 2016 revenue guidance from $76 billion to $72 billion, but still maintains it will generate net income of about $800 million.

Bottom Line on SNE

While the recent developments and new success are encouraging, and it’s good to see the company is getting out of businesses it knows it can’t do well enough in to bother with, owning SNE stock is still far from being a great bet. Much of the outlook presumes PS4 sales will remain resilient, but the video gaming market is one of the more fickle ones and can’t entirely be trusted.

Yes, the advent of Sony’s virtual reality hardware is causing a stir, and at a price point lower than the Oculus Rift, relative marketability isn’t an issue. At $399 pop though — just for the visor, not the console — and a limited number of games so far, the device might not exactly fly off the shelves in a way that does something significant for the top- or bottom-line.

And even if Sony is moving in the right direction again, an overbought SNE stock is apt to be reeled in sooner than later. That may be the wiser buy-point for anyone who believes the company is ready to rock and roll again.

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

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