On Sunday of this week, financial publication Barron’s touted a turnaround effort from Sony Corp (ADR) (NYSE:SNE), suggesting SNE stock could advance as much as 20% thanks to sales of video game and camera chips. And maybe it can.
The rosy outlook for an otherwise-beleaguered Sony does beg the question, however: Just how much heavy-lifting will these two product lines have to do to offset potential weaknesses the electronics giant is still facing with the other businesses it owns?
The answer to the question is best delivered in the form of a simple graphic, which appears below. As it turns out, camera and gaming technologies are, indeed, showing incredible growth, but they would have to maintain their current pace for some time for SNE stock to reach the kind of lofty valuation Barron’s is talking about.
Meanwhile, everything else Sony is doing is nowhere near as compelling.
Where Sony Is, and Isn’t, Thriving
For the record, Barron’s Jack Hough’s exact words were: “All told, if Sony continues its record of beating expectations, and shares hold on to their market-average earnings multiple, the ADRs could top $55 in a year, versus a recent $46 and change.”
The tone of the piece made it clear that video gaming and camera chips for smartphones would represent the lion’s share of the progress needed to add nearly $9 to the current SNE stock price.
The point is well taken and soundly supported. It’s still a tall order for just two of the company’s eight divisions, though, especially considering one of the two lost money last year and is still only projected to be the third-biggest profit-producer this year. There’s also the not-so-mall matter of keeping all of the other divisions afloat.
And that brings us to a question SNE stock fans and followers should be asking: What is on the radar that shouldn’t be, and what isn’t on the radar that should be? Specifically, could the market be overlooking potential headwinds for units other than games and semiconductors?
The image below tells the tale, plotting the company’s revenue and operating income by division for the past eight quarters.
Giving credit where it’s due, gaming is doing its part in terms of growth. Game revenue for the past twelve months is a healthy 1.7 billion yen, up 14% from the same twelve-month stretch a year earlier. Operating income for the video gaming division is 145 billion yen for the past four quarters, up 34% for the period.
And, the future looks bright on this front, with Sony’s PlayStation well-positioned against the uncomfortably expensive Xbox One X from Microsoft Corporation (NASDAQ:MSFT) headed into the heavy holiday spending season — if for no other reason than gamers will want to hold out and see what the PlayStation 5 is all about. Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) doesn’t have any new consoles near as ready and its Switch — which was once red-hot — is losing some of its marketing luster.
On the flipside, it’s tough to imagine Sony continue to grow its gaming division at the same pace in light of just how fierce the gaming and console market remains, and in light of the fact that the PlayStation 5 is still a long ways off.
As for smartphone camera chips (which are part of Sony’s semiconductor division), it’s hardly a big business, though that business is getting much more profitable. Revenue of 746 billion yen over the course of the past four quarters is a 31% improvement year-over-year — enough to put the division back in the black to the tune of 144 billion yen for the twelve-month stretch.
It’s still not the company’s shining star, though. Oddly enough, its financial services arm is still expected to be more profitable than semiconductors on a full-year basis and is projected to be almost as profitable as Sony’s video gaming unit.
In the meantime, revenue from Sony’s imaging, home entertainment, financial, movies and “other” divisions have only grown at a single-digit pace for the past four quarters. Should any or all of them slow to a halt or even retreat, games and camera chips will just have to do that much more heavy lifting. It’s not tough to see its movies and music business, both of which are struggling, further deteriorate, as more competing alliances are formed and consumers have more and more options to occupy their time and money.
And, so, the question is reprised: What, specifically, can and will Sony do differently in the future with gaming and camera chips that it’s not done recently that will push SNE stock upwards to the tune of 20%, bearing in mind those business lines may have to do double-duty?
The reality is, while the operating income trends, as they stand, for camera chips and gaming support the bullish case, in the technology world, such trends don’t last long. Other companies generally try to enter a proven market. In the meantime, Sony is operating five other arms that aren’t doing particularly well — any of which could easily turn into a full-tilt drag on results.
Looking Ahead for SNE Stock
I’m not bearish on SNE stock. I’m simply pointing out that, while a couple of its business lines are doing well, there are even more business lines that could offset that growth.
Were it a case like Apple Inc. (NASDAQ:AAPL), where the iPhone makes up the majority of its business, the logic holds up.
For a highly diversified company such as Sony, though, where no one business makes up more than roughly one-fourth of the organization’s revenue and income, most everything has to work well for the company — and shareholders — to propsper.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
