On April 26, Sony (NYSE:SNE) released its financial results for the fiscal year that ended on March 31. Although the company gave tempered guidance for the rest of the year, SNE increased 8% after the earnings call to close the week at $50.24. Despite the recent run-up in price, year-to-date Sony stock is up only 4%.
Setting the financial results report aside, Sony has a diverse portfolio ranging from the PlayStation gaming console to films, music, image sensors, semiconductors, and financial services. It also has a healthy geographical spread, whereby about a third of the sales comes from Japan, one fifth from the Asia-Pacific region including China, one fifth from the U.S., and another one fifth from Europe.
I believe that Sony, a Japanese staple company with high brand recognition worldwide, deserves consideration within a long-term investment strategy. Nonetheless, there are several short-term headwinds that investors should pay attention to as they decide whether to invest in SNE stock in the coming weeks.
Leadership Change at Sony
In March, Sony announced the upcoming retirement of Chairman Kazuo “Kaz” Hirai, whom Wall Street credits with the successful turnaround of the company in the past few years. In 2011, Sony’s loss was at $6.4 billion, and Hirai took bold steps to move the company forward. For example, management sold off its chemicals and Vaio PC businesses. Today Sony is profitable again.
His leadership saw Sony become an entertainment company with stable revenue from especially the gaming and music divisions. As the company’s finances improved, the Sony stock price also went up from about $11 in 2012 to a high of $61.02 in October 2018.
Now, Sony’s gaming segment accounts for about one-third of the operating profit. Last year was indeed Sony’s most profitable year ever for its gaming division. Sony is the world’s second-largest gaming company after Tencent (OTCMKTS:TCEHY), one of China’s largest companies.
Its financial services division, which began in 1981, is the second-largest contributor to both revenue and operating profit after gaming. Sony’s image sensors are used in Apple’s (NASDAQ:AAPL) iPhones and are likely to be included within the phones of Samsung Electronics (OTCMKTS:SSNLF) in the near future, too.
Effective June 18, Hirai will be handing the reins to Kenichiro Yoshida, who has already been promoted to CEO about a year ago. Although the initial leadership transition is likely to be smooth, investors, who are waiting for the company’s next source of growth, may decide to sit on the sidelines to see the strategic decisions Yoshida will take.
Activist Investors and Sony Stock
The leadership change coincides with another recent development for Sony. In early April, SNE stock initially jumped at the speculative news that Daniel Loeb’s Third Point hedge fund is likely to be buying a stake in the group, for the second time in six years.
Although Sony is a profitable company with stable cash generation, investors also realize that its operating profit is slowing down. For example, Wall Street does not believe Sony has a clear path to long-term profitability in the mobile segment.
Similarly, many analysts now feel the gaming giant is at crossroads with its crown jewel, i.e., PlayStation 4. The highly-anticipated next-generation console PlayStation 5 is unlikely to hit shelves until late 2020. Meanwhile, the games division is slowing down.
The activist investor may push Sony management to divest from various businesses, such as the loss-making mobile and smartphone business, and to address shareholder interests better. Could Loeb decide to make a case for Sony to return more cash to shareholders, such as higher dividends or stock buybacks, so that the company may attract a wider investor base seeking consistent and higher yields?
It is too soon to say how the activist pressure may affect the future of these separate segments and subsequently Sony’s stock price.
The Bottom Line on Sony Stock
April has rewarded SNE investors, partly due to the initial positive reaction to the potential investment by Loeb and partly due to the positive earnings results. However, this rally may be short-lived as I’m now expecting some profit-taking in SNE stock.
Sony has an upcoming “Investors Day” scheduled for May 21. I’d urge potential investors to analyze what the company may say on its current products as well as new product developments before they hit the “buy” button in the coming weeks.
Also, Sony stock’s beta is 1.36, which means its volatility on average is 36% higher than that of the broader market. Therefore, if other gaming stocks that will be reporting earnings in May (such as Activision Blizzard (NASDAQ:ATVI) or Electronic Arts (NASDAQ:EA), decline SNE stock price may also be adversely affected.
If you already hold Sony shares and would like to protect some of your profits in the SNE stock in case of a price drop, you may consider a covered call strategy with approximately an eight-week time horizon.
In that case, you may, for example, buy 100 shares of SNE at a limit price of $50.24 (the closing price on April 26) and, at the same time, sell a SNE June 21 $50 call option, which currently trades at $2.45 and offers downside protection in case of volatility and a decline in Sony stock.
This call option would stop trading on June 21 and expire on June 22.
On the other hand, longer term, Sony is still a viable investment and I’d consider buying into SNE shares between $40-$45.
Meanwhile, investors who are interested in entertainment or Japanese stocks but do not want to commit all their capital to a single stock such as Sony may also consider investing in various exchange-traded Funds (ETFs) that have the SNE stock as a holding, including ETFMG Video Game Tech ETF (NYSEARCA:GAMR), iShares MSCI Japan ETF (NYSEARCA:EWJ), or BLDRS Asia 50 ADR Index Fund (NASDAQ:ADRA).
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
