To be honest, it’s difficult for investors — particularly individual American investors — to get much of a handle or have much of an edge on Sony Corp (ADR) (NYSE:SNE) stock. Sony stock has had an impressive run. The SNE stock price has risen 59% so far this year; it’s more than quadrupled since late 2012.
But trying to get a read on Sony’s future prospects is a daunting challenge — for a number of reasons. The company simply is so diversified. Sony makes TVs, video game players and smartphones. It has content businesses in film, television and music. The semiconductor segment manufactures image sensors for smartphones. On top of all that is a highly profitable, and often-ignored, insurance business.
As a result, an investor needs to understand the competitive landscape of those businesses, many of which have limited or zero US presence. The potential impact of yen/dollar fluctuations adds yet another layer of complexity. Sony isn’t just about the PlayStation or its US consumer business. In fact, the hardware portion of the Game & Network Services segment, which includes the PlayStation platform, drove just 8% of revenue in fiscal 2017 (ending March). The United States, as a whole, accounted for less than 20% of sales.
Those caveats aside, however, there are broader trends that could impact Sony stock — in either direction. SNE stock is an admittedly imperfect bet on major changes in the electronics and content industry. How investors see those trends playing out likely will inform their thoughts on the still-reasonable SNE stock price.
There is an increasing belief among investors that electronics hardware is a poor business. There’s a reason why the world’s premier hardware manufacturer, Apple Inc. (NASDAQ:AAPL) still trades at relatively low earnings multiples.
This isn’t a new trend. TV prices have been plunging for years, despite ever-increasing quality. PC prices have followed suit. Smartphone “commoditzation” is ongoing, leading to a split market: high-end phones from Apple and Samsung on the top, low-end overseas manufacturers on the bottom.
Including cameras, audio, TV and video games, about 30% of Sony’s revenue comes from hardware, per figures from its 20-F. Another ~10% comes from the components and semiconductors businesses that supply hardware manufacturers. That ~40% exposure seems potentially dangerous. Home Entertainment & Sound revenue has declined 17% over the last two years, for instance. The camera business is in secular decline, but still drives ~8% of SNE revenue.
But one reason for this year’s strength has been good news on the hardware front. Even backing out currency benefits, Home Entertainment & Sound revenue rose 7% in the first quarter — and a sizzling 17% in Q2. In both cases, the gains came from the supposedly dead television business, as consumers traded up to more expensive models. Image sensor sales have shot up as well, though the gains are coming in large part due to earthquake-driven comparisons a year ago.
From a broader standpoint, a key question for Sony — even with the SNE stock price at a reasonable 17 multiple — is whether it can continue to manage the difficult hardware space. Worldwide, the Sony brand still has value, and first-half results show there’s still some life in TVs. The PlayStation continues to dominate the Microsoft Corporation (NASDAQ:MSFT) XBox. If that’s enough to keep hardware profits relatively flat, there’s probably enough here to see further upside for SNE stock.
What’s Content Worth?
The media landscape in both video and audio content has been upended over the past few years. The “arms race” in streaming content among Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN) and Hulu, among others, has led to soaring content costs — and content values.
And Sony has a lot of content.
Among its franchises are Spider-Man and Ghostbusters. In TV, Sony has produced Breaking Bad and spin-off Better Call Saul, Justified and The Last Tycoon for Amazon. Licensing revenues from its catalog have risen of late, thanks to streaming demand. There’s a valuable music business as well.
So, another key question relative to the SNE stock price is whether this content supports higher valuations going forward. The Disney-Fox deal shows that, at least for now, content is king. And as James Brumley pointed out last week, Sony is becoming a leader in virtual reality — which could amplify its content heft in both gaming and media.
SNE Stock Price Isn’t Cheap Enough
From here, even at a cheap multiple, I see enough to stay skeptical toward SNE stock at current levels. I see hardware being in long-term decline. Sony’s content simply isn’t as valuable as Fox’s, and despite years of speculation, Sony has shown no interest in a similar breakup.
Underlying all of this is an insurance business that is dealing with demographic challenges in Japan and two decades of near-zero interest rates. For all the hype about the consumer businesses, it’s that unit that actually would have, perhaps, the biggest effect on SNE stock price were those rates to ever normalize.
With no sign of that on the horizon, however, and risks elsewhere, even an attractive SNE stock price doesn’t look cheap enough. At the very least, there seems to be easier ways to make money — even in a market at all-time highs.
As of this writing, Vince Martin has no positions in any securities mentioned.