Sony Inc (ADR) (NYSE:SNE) is a serious buying opportunity right now. The stock is down recently due to an analyst downgrade. However, this selloff makes Sony stock extremely attractive given the company’s prospects in 2018. Read on to find out why and how you can take advantage of the situation.
First, let’s deal with the Sony stock downgrade. On Tuesday, JPMorgan Chase & Co. cut it’s rating on SNE stock to “neutral” from “overweight.” The analyst argued that demand for smartphone-camera image sensors would fall dramatically this year due to falling demand for Apple Inc.’s (NASDAQ:AAPL) iPhone X.
Image sensors account for about 9% of Sony’s total revenue, just ahead of sales for movies and music. Concerns about iPhone X sales projections have cropped up quite a bit recently, with slack Chinese demand cited as a major driver.
Now, I’m not saying the image sensor market isn’t a concern, but Sony has considerable growth in another unit that should more than make up for the shortfall. That unit is the company’s PlayStation arm.
You might be thinking that the PlayStation 4 is a bit long in the tooth coming into 2018. The console launched in 2013, putting the PS4 near the back end of a console’s lifespan. However, Sony refreshed the system in 2016 with the PS4 Pro just ahead of the PlayStation VR’s release.
That last bit of equipment, the PlayStation VR, is going to help drive console sales. VR is growing fast in the video game industry, and Sony is going all out to support it’s latest bit of high-tech gaming hardware — even offering free VR games to PlayStation Plus subscribers.
So far, more than 2 million PlayStation VR headsets have been sold since the device launched in October 2016. I expect more to come as AAA titles begin to support the device, especially the online multiplayer games like Call of Duty and Madden NFL.
What’s more, we should start seeing greater impact from the PlayStation division soon — possibly in next week’s quarterly earnings report. For the quarter, Sony is expected to post a profit of $1.13 per share, well above last year’s earnings of just 14 cents per share. Revenue is expected to surge 27% to $23.89 billion.
Click to Enlarge Analyst coverage on SNE is thin, and more coverage could be a boon for Sony stock. Currently, Zacks reports that three of the four analysts following SNE rate the shares a “buy” or better. There are no “sell” ratings. The 12-month consensus price target sits at $55, leaving plenty of rally room for the shares before valuation becomes a concern.
Turning to Sony stock options, Feb. 2 series implieds are pricing in a potential post-earnings move of about 5.9%. This places the upper bound at $52 and the lower bound at $46.
From a technical perspective, the recent downgrade has SNE pulling back to support at it’s December highs and its 20-day moving average. Additional support lies at Sony stock’s 50-day moving average in the $47 region. Resistance lies at $50 and $55. A break above $50 following earnings could see follow-through buying send the shares quickly to $55 in the ensuing weeks.
2 Trades for Sony Stock
Call Spread: Traders looking to benefit from a post-earnings rally from Sony stock might want to consider a Feb $50/$50.50 bull call spread. At last check, this spread was offered at 20 cents, or $20 per pair of contracts. Breakeven lies at $50.20, while a maximum profit of 30 cents, or $30 per pair of contracts — a potential 50% return — is possible if Sony stock closes at or above $50.50 when February options expire.
Put Sell: On the more conservative side, a neutral-to-bullish Feb $45 put has plenty of potential. This put was last bid at 40 cents, or $40 per contract.
As long as Sony stock trades above $45 through expiration, traders pursuing this strategy will keep the $40 premium. However, if Sony trades below $45 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $45 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
