Even with the benefit of a gain of more than 8% in April, the performance of Sony (NYSE:SNE) stock has been disappointing. So far in 2019, Sony stock is lower by 4% and over the past year, Sony stock is down 5%.
Compare that to the MSCI Japan Index and the S&P 500, which are up 9% and 16.10%, respectively year-to-date. Sony, the maker of the PlayStation video-game console, has recently been taking its lumps. In the video-game space, SNE faces intense competition from established competitors, such as Microsoft Corp. (NASDAQ:MSFT), as well as some well-heeled new entrants. Additionally, some sell-side analysts are not impressed with Sony’s efforts to shed its lagging businesses.
“Sony’s inability to exit the Smartphone business resulting in continued losses, a peak of game profits and increasing uncertainty imply pedestrian profit growth over the next two years,” said Jefferies analyst Atul Goyal in a note to investors last month, in which the analyst downgraded Sony stock to “hold” from “buy.”
The analyst forecast tepid profit growth across some of Sony’s other marquee businesses.
“Goyal estimates profits in Sony’s insurance, television, and imaging businesses will each either decline or flat-line during its fiscal 2019,” reported Barron’s. “In addition, he predicts the profits of Sony’s gaming business will fall 5% annually over the next two years due to hardware price cuts and falling software sales,” the publication noted.
Enter the Activist
As noted earlier, Sony stock roared higher earlier this month amid speculation that Daniel Loeb’s Third Point hedge fund is building a stake in SNE stock. The hedge fund previously held a position in Sony stock and urged SNE to spin off its movie business to create value for shareholders. But SNE ignored that advice, and Third Point liquidated its position in Sony stock in late 2014.
“Third Point’s amassed stake in Sony thus far could not be learned,” according to Reuters. “The hedge fund, which has about $14.5 billion in assets under management, is raising a dedicated investment vehicle, targeting between $500 million and $1 billion in capital, so it can buy more Sony shares, ” the news service added, citing unnamed sources.
It appears that Third Point will once again push SNE to sell its movie business in order to boost Sony stock. Again citing unidentified sources, Reuters reported that Third Point believes Amazon.com Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) have expressed interest in buying Sony’s movie business.
Sony’s movie business is estimated to have generated revenue of $2.85 billion in the first three quarters of 2018. The U.S.-listed version of Sony stock has a market capitalization of $58.4 billion as of Apr. 11, indicating the movie unit is a small, but still valuable, part of the overall value of Sony stock.
The Bottom Line on Sony Stock
The bottom line for long-term investors who are considering buying SNE stock is that more than supposed interest from an activist investor is needed to further boost SNE. Markets are efficient and, as highlighted by the Apr. 8 pop of SNE stock, the Third Point rumor is now baked into the valuation of SNE stock.
Based strictly on its price-earnings ratio, Sony stock is cheap. The shares trade at just 12 times analysts’ consensus estimate for fiscal 2020. Plus, SNE has $8 billion of cash, representing a pretty significant chunk of its market value. Even with the recent downbeat tone on SNE stock sounded by some analysts, the average analyst price target on Sony stock is north of $64, representing significant upside from the stock’s level of $46 in late-morning trading on Apr. 11.
An addendum to the bottom line of Sony stock is that investors who buy SNE in the near-term are likely making bets that the company will shed its movie or smartphone businesses or both. But there are simply no guarantees that SNE will carry out either transaction.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
