Sony Corp (ADR) (NYSE:SNE) is breaking all sorts of records. For starters, SNE stock has recovered from a long slump, recently hitting new 10-year highs. The business is bringing the heat as well.
The company is now forecasting an all-time high in earnings, topping its 18-year-old record. Aside from movies, every Sony division is performing well, with its gaming, virtual reality and semiconductors putting up outstanding numbers. As is often the question after big moves, though, can the fun continue?
Here are the pros and cons for SNE stock:
SNE Stock Cons
Inconsistent Business: SNE stock has been a long-term loser in a really big way. SNE stock traded for $43/share for the first time in 1997. And it’s at $43 again today. For 20 years, the only return Sony has provided to shareholders is its meager dividend, which currently is at just 0.5%/year.
Sony hit its all-time peak in 2000, along with many other tech stocks. Even discounting that aberration, the stock has been dead money. SNE stock traded back up to $55 in 2007, and is still well short of even breaking even since then. Yes, bulls will say this is a new revived Sony. Since 2014, the company has appeared to shake off its decades of funk. However, corporate transformation can be hard to sustain. Several of Sony’s current growth drivers, including gaming and semiconductors, could revert back to much lower baseline levels of profitability in a hurry.
Will The Earnings Growth Continue? Analysts seem confused on how to model Sony. In September, both Credit Suisse and Citigroup downgraded SNE stock from buy to neutral. On October 11th, Morgan Stanley joined the skepticism, also cutting SNE stock to neutral.
At the time, these firms felt that Sony’s earning growth was slowing down. And, what’s changed since then? Yes, gaming is strong, but how much more potential is left in the near-term? And other areas such as semiconductors and mobile games may be set for more of a slowdown as well. Of course, Sony shocked the market with surprisingly good numbers this past week. But is it something sustainable or a one-quarter wonder? With SNE stock up 55% and analysts turning increasingly skeptical, it might be time to take profits.
Cinemas In A Funk: According to Hollywood Reporter, this was the worst summer for Hollywood in 25 years. Revenues plummeted 14.6% to below $4 billion. That’s the first time the industry failed to bring in $4 billion in more than a decade. Adjusted for inflation, things look even worse.
This is hardly the fault just of a weak slate of films. Going into the summer, analysts had mixed forecasts, few were predicting an outright disaster. AMC Entertainment Holdings Inc (NYSE:AMC), a leading US cinema chain, has lost half its value since May. Fortunately, just about every other division Sony has is performing strongly. But the cinema division is struggling, and given current trends with online streaming and younger users, there’s no guarantee that things will swing back up.
SNE Stock Pros
Dominates Virtual Reality: Sony is killing it in virtual reality. In fact, their lead, due to a large installed user base with PlayStation, is almost too big. Sony’s interactive division CEO, Andrew House, stated that: “I’m not entirely comfortable being the market leader in VR by such a margin that seems to be happening right now […] With such a brand new category you want a variety of platforms all doing well to create that rising tide and create the audience.”
IDC data found that Sony sold more than 500,000 units in the three months ending June 2017, which gave it an “unmatched” lead against rivals such as HTC’s Vive and Facebook Inc’s (NASDAQ:FB) Oculus Rift. You know you’re in a good position competitively when you wish your rivals were putting up a better fight.
Switch Doesn’t Matter: The Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) Switch has seemingly taken the gaming world by storm. Nintendo stock keeps hitting new highs as its Switch sales estimates keep going higher and higher. In its first year, the Switch is now expected to outsell the entirety of Wii U sales over its lifespan.
You’d think that would be bad news for Sony. But it doesn’t appear to be impacting PlayStation sales at all. Sony’s gaming division is heading for a record-breaking year as well. Like with Nintendo’s Pokemon Go, the company seems capable of tapping into a different segment of gamers that previously weren’t engaged in the community. In this case, Nintendo’s win isn’t bad news for SNE stock at all.
Record Year Across The Board: Sony is heading for a record year in gaming. And that’s not all. Excluding the struggling movie division, every other Sony subsidiary expects growth on the year. Add it all up, and Sony now guides the full-year to 630 billion yen ($5.5 billion) of profits.
If achieved, this would top Sony’s old yearly profit record, set way back in 1998, of 526 billion yen ($4.6 billion). Sony stock traded substantially higher in 1998 (and also in 2007) than it is going for today. If SNE stock can regain its past valuation multiples, it can go a lot higher, given its record profit base.
Verdict
SNE stock has undeniable momentum. And I’m not going to rain on the parade, like certain banking analysts were recently doing. There’s a good chance that Sony stock is heading for $50 in the near-term, still offering 15% upside after its recent rally.
That said, be cautious about making this too long-term of an investment. Gamers can be fickle, and there’s not enough evidence yet to suggest that the rest of Sony’s business will maintain its higher levels of profitability. Sony has been a poor performer over the decades. As such, it’s not been a bad idea to take gains into its periodic big rallies.
At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
