Sony (NYSE:SNE) stock is a consistent performer but somehow manages to fly under the radar. Shares of the Japanese conglomerate have increased close to 143% over the last five years.
While that is not the kind of growth that we have seen with Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG); it’s still respectable, consistent growth, the likes of which any investor will love. Considering the launch of the next-gen Playstation 5 is nearly upon us, you would think that the stock price would be on fire. Fortunately, that is not the case, as the company seems to be trading at discounts to its peers.
PlayStation 5 Launch Poised to Be a Gamechanger for Sony Stock
There are benefits and drawbacks to being a conglomerate. The most significant advantage is that you have several divisions that can take care of you in a downturn. That’s precisely the kind of situation Sony found itself in this year. Due to the novel coronavirus pandemic, it was inevitable that Sony Pictures would suffer. But the hammering of its electronics business and imaging and semiconductors division was an unwelcome development.
With fears of a second Covid-19 wave, stores in many countries will likely remain closed. When these areas of business get back on track is anyone’s guess. The pictures division, in particular, will take years to recover.
The much anticipated “Peter Rabbit 2:The Runaway“, originally expected to release this year, stands delayed till 2021. Meanwhile, the next editions in the famous “Spiderman” and “Jumanji” series are also delayed. However, with a net cash position of ¥91.2 billion, Sony has enough funds to weather this crisis.
Its main aim will be to survive the year and focus all its efforts into the PlayStation 5 video game console launch. I know what you’re thinking. Disposable incomes are down, and unemployment is still high. But PlayStations have proven to be recession-proof in the past, and there’s no reason to doubt that we won’t see increased sales in November.
Competition Is Always a Good Thing
Although it may seem Sony is the pretty pony in a one-horse race, that is not the case. Microsoft’s (NASDAQ:MSFT) Xbox is a direct challenger to the new PlayStation. Both consoles will release two days apart from each other, so gamers will be in a pickle as to which is their favorite. The choice will be even more complicated, considering that there will be two versions each of the Xbox and the PlayStation to choose from.
Sony will be coming out with the PlayStation 5 and the PlayStation 5 Digital Edition. Meanwhile, Microsoft will release Xbox Series S and Xbox Series X. The digital edition PS5 will debut at a price point of $399, $100 more than Microsoft’s Series S console, while the regular console and Xbox Series X will both retail at $499.
At this point, it may seem like a foregone conclusion that Sony will outpace Microsoft. Yes, PlayStation 4 did sell 110 million units versus 50 million unit sales for the Xbox One. But Microsoft has a different strategy this time. Apart from the Series S console retailing at a $100 discount, Microsoft offers console financing for $24.99 per month, including Xbox Game Pass.
Stiff competition is in Sony’s future, but it’s not like they are resting on their laurels. Sony recently paid $250 million to purchase a minority stake in Fortnite publisher Epic Games. Meanwhile, the PlayStation Plus subscription service now has 45 million subscribers. This year also saw the release of The Last of Us 2 and Ghost of Tsushima, two highly anticipated titles that broke several records. So, all in all, Sony’s gaming division is shaping up to have a bumper year.
All in the Family
One of the best things any company can have at its disposal is able management.
Recently, Sony went ahead and took its financial unit private, in a blockbuster deal worth ¥395.5 billion, or $3.7 billion. Dan Loeb of Third Point was arguing against the move. His suggestion was to spin off the unit so that Sony can concentrate on its Gaming, Music, and Imaging & Sensing Solutions segments.
Lo and behold, when the pandemic struck, the finance unit managed to do exceedingly well, one of the rare business segments that did not suffer. That goes to show the power of diversification, especially in today’s environment. Sony’s financial unit is an ace up its sleeve, and the management deserves brownie points for recognizing this fact.
Summing Up
Sony is in an excellent position before the PlayStation 5 launch. The slowdown in its business segments is natural, but gaming will make up for losses this year. Despite the pandemic, Sony saw revenues grow to ¥1.97 trillion, increasing 2.1% on year on year basis. Pretty good, considering the state of the world economy.
Before we wrap up, let’s talk about valuation, a real positive for Sony stock. Shares are trading at 19.12 times forward price-to-earnings. That is cheaper than the industry average of 25.60 times and is also at a discount to Apple, Microsoft, and Nintendo (OTCMKTS:NTDOY). Like I said in my intro, perhaps the lack of interest in Sony stock has got to do with the fact that its a Japanese conglomerate. Plus, diversified companies are always a bit undervalued in comparison to pure plays.
Regardless, reasonable valuation means that you can snap Sony stock at discounted rates.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.
