Sony Corporation (NYSE:SNE) is firing on all cylinders. Ever since it put less emphasis on its TV business, the company redoubled its efforts in gaming consoles, VR, and video games. The move is paying off. Although shares of SNE stock pulled back from highs reached in Nov. 2017, the drop is giving value investors another good entry point.
At a forward 17x multiple, SNE stock is inexpensive. By comparison, shares of Microsoft Corporation (NASDAQ:MSFT) trade at a forward P/E of just below 23 times.
Sure, Microsoft deserves a premium for its success in growing its cloud services business that includes Office 365. But Sony is maintaining a comfortable lead over Microsoft’s Xbox. On Dec.3, Sony said that it sold 70.6 million PS4 consoles since its launch in 2013. It also sold over 2 million VR headsets.
The unit sales for VR should hardly earn any praise from gamers but it does suggest that the uptake of the technology will probably remain sluggish.
No Headwinds Ahead for SNE Stock
Sony shareholders need not worry about Nintendo’s success in the Switch console. Sony is still the dominant console, so it will take years before Nintendo catches up. But investors must look at the bigger picture: the strong growth in video games will lead to higher revenue for all game makers.
According to NPD, game sales grew 30 percent in November compared to the year before; consumers spent $2.68 billion.
Although Activision Blizzard, Inc. (NASDAQ:ATVI) led the higher game sales with its Call of Duty title, consumers will need to buy a console to play them all. That is good news for SNE stock because demand for the PlayStation 4 will keep going up.
In that same November period, hardware sales jumped 52 percent year-over-year, to $1.1 billion. Still, it’s worth pointing out that Sony sold more by unit count but Microsoft brought in more revenue.
Strong Outlook
On its second-quarter earnings call, Sony revised its operating income forecast for the full-year. It cited a strong first-half start as a reason for the stronger outlook.
Even in its music business, Sony is confident that the unit will continue growing. During the quarter, sales grew 38 percent Y/Y, thanks to demand for recording music and music publishing and due to the increase in streaming revenue.
Smartphones are still a drag on Sony’s business. The ROIC (return on invested capital) is too low. Sony’s only option is innovating on the hardware to spark higher demand.
Unfortunately, Sony’s fixed costs are too high and the product is not attractive enough to spur higher demand. In Q2, growth was negative. The company forecast yearly smartphone sales falling by a million units for fiscal 2017.
Strong TV Business
In August, Sony expected its product mix would not match demand. But unit sales actually improved in that time, leading to higher profitability. Business is doing so well for TVs that Sony will increase its capacity. Lower panel costs also gave profit margins a positive lift.
Further, the shift in the product mix that favors premium models, such as 4K models with screen sizes larger than 55 inches, will also keep Sony’s TV business healthy. Finally, new leadership in the TV business should also give the unit a positive boost.
Takeaway
Sony rewarded its shareholders a solid return of over 60 percent in 2017. Instead of chasing the stock at this time, value investors may want to wait for a pullback before holding the stock.
The company faces no headwinds in the near-term but the stock’s price already reflects strong growth in TV, music and gaming console. If growth in any of those segments slows, even temporarily, SNE stock may fall.
Disclosure: Author does not own any shares in the companies mentioned.
