Since the Nikkei 225 peaked in 1989, Japanese companies have been a dicey proposition, and Sony (NYSE:SNE) is no exception. On one hand, the country’s decades-long recession has dropped stock valuations to insane lows. However, many names, including Sony stock, have still not performed very well.
But since the middle of this decade, the once-vaunted consumer-electronics giant has found new life. Coinciding with the election of Prime Minister Shinzo Abe, SNE stock recorded consecutive years of advances. That’s not surprising, since Abe’s campaign platform included promises of economic reform, which people commonly refer to as “Abenomics.”
Moreover, Abe is on track to become the longest-serving prime minister in Japan’s history. This is a level of political stability that Japanese companies have not seen in a while. SNE as well as its domestic competitors have benefited from that stability.
But while several analysts have recently increased their price targets on Sony stock, the weakness of international markets has negatively impacted SNE stock. In particular, the selloff of U.S. markets in October sharply impacted SNE because the company depends on American consumers.
If Americans are not opening their wallets, very few Japanese companies will be immune from the resulting pain. So it’s not surprising that Sony stock is down 15% from its interday 2018 high.
Nevertheless, I believe the market weakness has created a compelling contrarian opportunity for the owners of Sony stock. As Zacks Equity Research suggested, Sony stock is undervalued based on commonly-cited valuation metrics. However, I’m gambling on Sony stock based on the changing complexion of its business.
Sony’s Content Empire Can Lift Sony Stock
Aside from the ever-present demand for Sony’s PlayStation gaming console, another factor captured my interest: earlier this year; SNE bought all of the shares in EMI Music Publishing that it didn’t already own.
The buyout was the biggest factor behind the recent 30% increase in Sony’s full-year operating-income guidance. That translates to a nominal impact of 200 billion yen, or approximately $1.77 billion. However, it should be noted that part of the reason for the increased guidance was that management bought the remaining stake in EMI at a premium, which lifted the original stake’s value.
But behind this wonky detail lies a fundamental strategy: Sony intends to create a content empire. With EMI completely under Sony’s belt, SNE now has the kind of leverage to content that Disney (NYSE:DIS) enjoys.
Before DIS acquired Twenty-First Century Fox’s (NASDAQ:FOXA) entertainment assets, some investors feared that Disney had already overextended itself. It’s a legitimate concern, but the rewards are incredibly enticing. After buying the Fox assets, Disney wields a comprehensive content umbrella.
Sony can easily follow suit, which is why, if you like Disney, you should really focus on Sony stock. For instance, one of the top video games of this year is Spider-Man. In fact, within the first three days of its release, Spider-Man sold 3.3 million copies, setting a record for a Sony game.
Bolstering Sony’s content catalyst is its action-adventure film, Venom. Based on the Spider-Man universe, Venom has generated over $212 million of domestic box-office revenue. After the movie was so successful financially, SNE could easily launch more sequels and exclusive video-game titles that are based on the film. If many elements of the Venom franchise are lucrative, they could have a meaningful, positive impact on Sony stock.
And in the wake of the EMI deal, SNE stock will benefit from a comprehensive – and exclusive – content library.
Don’t Forget Sony’s Electronics Core
With Sony’s more visible entertainment business catering towards popular platforms like video games and blockbusters, we can forget what drives SNE stock. Although Sony’s Walkman days are long gone, its core consumer-electronics business is still vibrant.
Earlier this year, the company made headlines in tech publications when it demonstrated its 48-megapixel CMOS image sensor. Designed for smartphones, the sensor takes brilliant pictures in lighted conditions. Under less-than-ideal lighting environments, though, the system makes adjustments that increase brightness and cut down on image “noise.”
Apple (NASDAQ:AAPL), a long-time Sony client, has previously eschewed high-pixel density cameras due to their poor performance in low-light environments. But with this new technology, Apple can have the best of both worlds.
Moreover, Sony’s latest image sensor fits in with Apple’s adjustment to the “peak smartphone” situation it faces. Rather than focusing on unit sales, Apple intends to increase its profitability per unit. Sony’s CMOS sensor is a strong selling point that could justify the high prices of future flagship iPhones, benefiting both parties.
Of course, investors should remain vigilant. Several geopolitical elements have converged, making investing a tricky proposition. But over the long run, the recent sharp correction of Sony stock is a golden opportunity. Given the many proven positive attributes of the Japanese tech giant, Sony stock is definitely a very good bet over the longer term.
As of this writing, Josh Enomoto is long Sony stock.