Sony Corp (ADR): Fatter Margins Have Them Back in the Game

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Investors were reawakened to shares of Sony Corp. (ADR) (NYSE:SNE) this month after a surprisingly profitable quarter.

Sony Corp (ADR) (SNE): Fatter Margins Have Them Back in the GameThe Japanese consumer electronics and entertainment conglomerate earned 130 million yen on revenue of 2.062 billion yen for the quarter ending in September, but it was enough to send the stock from below $39 per share past $48 per share in one week.

The stock opened for trading today at $46.85 per share.

The company’s video game and semiconductor divisions got credit for the gain, but analysts immediately began speculating on the entertainment assets Sony might buy with its new-found credibility and market cap of nearly $58 billion.

But is Sony really all the way back or is this yet another false dawn? Since the Great Recession hit in 2008, Sony stock has tried repeatedly to come back, only to fall. Why is this different?

New Potential

Sony’s comeback is built on the success of its PlayStation 4 against Microsoft Corp. (NASDAQ:MSFT) and its Xbox console. Sony dominates the console market with a 57% share, including 7 million units sold in the first half of 2017 for a total of 60.4 million.

Just as important, Sony now has 26.4 million subscribers to its Playstation Plus service, at $60 per year each, and has sold over 1 million virtual reality headsets in a market where bigger rivals have failed to gain traction. Microsoft responded with the Xbox One X, a more expensive console.

Profits from gaming now have Sony’s name being mentioned wherever media assets are sold, like the film and TV production units of 21st Century Fox Inc. (NASDAQ:FOXA), which Walt Disney Co. (NYSE:DIS) has reportedly begun negotiating for. The success of Spider Man: HomeComing, which had global box office receipts of $880 million, may be telling CEO Kazuo Hirai, and the market, that the division can handle more properties.

Getting Ahead of Ourselves?

Sony, however, is not all the way back. It is still selling a lot of products, like TVs, that are struggling in the market. Because TVs don’t wear out as they once did, they are subject to deflationary forces known as Moore’s Law.

As Sony’s shares have shot up, analysts have become more cautious, with three moving from the “buy” to the weaker “hold” category in the last three months.

InvestorPlace writers are also giving just half-hearted applause to the new Sony. Both Luke Lango and Ian Bezek have written recently that the stock may be good for $50 per share, but not much more.

I covered Sony through its early-decade fall from grace, even speculating five years ago that the company could disappear. As Apple Inc. (NASDAQ:AAPL) had Steve Jobs, Sony had Akio Morita, a legendary company builder, and his success hung heavily over successors in the years after his death.

Hirai, who ran the video game division before becoming CEO in 2012, has launched a comeback that looked real in October, even before earnings, and assets like the movie studio are becoming more valuable as Chinese buyers start to emerge.

The Bottom Line on Sony Stock

Sony’s gaming franchise gives it strength rivals like Disney and Fox lack. It is gaming that is soaking up the time of younger consumers, not movies or cable, something older analysts raised on TV still don’t understand.

The problem is that the profits in gaming are in the software, the games, rather than the platforms. The roster of Sony’s best games is more a “what’s that” than a “who’s who”. If the company put its money into software, rather than just entertainment, it could become a real contender.

Until then, it’s just a trade.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.

 


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/sony-corp-adr-sne-fatter-margins/.

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