VirtualArizona (@ArizonaV) na getquin

SONY stock analysis - Playstation forever? $SONY (-0,49%)

Konbanwa mina,

Honjitsu wa Sony tabu o bunseki shimasu.

Today it shall be about SONY a company whose products might have been under the Christmas tree of many people. Before we begin, as always, my disclaimer:

DISCLAIMER: This is not investment advice. It is also not an invitation to buy/sell financial products. These are always associated with risks. I only describe my opinion here. You decide for yourself what you do. Therefore no liability.

My analysis will follow the following structure:

PART 1

SONY in figures, data and facts
Cineastics as diversification - opportunities & risks
Analysis of the core business
My conclusion

PART 2

SONY, Nintendo and Microsoft - the video game market

SONY is just as important as KEYENCE is one of the TOP 5 companies in Japan and manufactures televisions, stereo systems, video cameras and game consoles. Currently, KEYENCE and SONY are direct followers of each other in terms of market capitalization. SONY is currently at 95.02 billion USD market capitalization, while KEYENCE is at about 93.74 billion USD, depending on the market movement. The difference is therefore not too big and amounts to:

1-(95.02 billion USD / 93.74 USD) = approx. 1.4% difference

Thus, in terms of product range, SONY is a typical tech company within the TOP 5 most highly valued companies in Japan (see (1), (2), (3)). If you want to familiarize yourself with KEYENCE first, you can find the starting point of the analysis series on KEYENCE here:

Teil 1: https://app.getquin.com/activity/dvMDuOjKAc?lang=de&utm_source=sharing

Teil 2: https://app.getquin.com/activity/SdhQFRPZHl?lang=de&utm_source=sharing

Who is SONY anyway? Just Playstation and that's it?

SONY combines a proud conglomerate of brands behind it that in many cases is not apparent at first glance. Sony's current brands include:

XPERIA (smartphone series from Sony)
SONY PICTURES (Sony's cineastic company)
TRISTAR
COLUMBIA

While many of you may have already associated the XPERIA line with Sony and heard of SONY PICTURES, TRISTAR and COLUMBIA represent very interesting sub-brands of the SONY group. TRISTAR, for example, also belongs to SONY - but not directly but through the umbrella company Columbia Tristan Motion Picture Group. So as soon as you see Tristar's Pegasus in front of a movie, you know that SONY is indirectly involved. That's interesting in that this tech company is diversifying within the tech industry.

Why should we even bother with SONY's cineastics products?

Of all the business sectors, the movie sector shows the highest growth of 63.28%, dwarfing all other sectors. In 2022, after all, it earned JPY 1,238,910 million. At an exchange rate of 0.0071 euros per yen, this translates into approximately 881 million euros. An emerging area of SONY (see (8), (21)).

To better understand my thought on this, imagine the following figure:

Selection of setting and script -> film shooting -> production of image and sound recording -> marketing of the film.

Figure 1: Process chain for mapping the film process (simplified, colorized)

Figure 1 depicts core tasks and their references of the film shooting process. As described above, SONY itself sells various video cameras and owns the US production company Tristar. This means that the step "selection of the setting and script" plus "film shooting" can be carried out by the SONY Group in isolation. The step of production of picture and sound recording is also feasible by SONY without any problems. Source (6) is the official product site for professional film needs and includes video cameras and audio products related to film shooting. In addition to live streaming solutions, wireless audio technology also exists, as well as products for filming in inhospitable or harsh environments with frequent camera rotation (see (4), (5), (6)).

Why is this important?

SONY's diversification toward cinematic products, in addition to the typical advantages of this concept, also allows it to penetrate a specific market. For example, source (7) includes a reference to a portable camcorder from the PXW range, which has even been used for ITV regional news. Almost every one of the marketing pages for the other products includes a reference to the fact that the products can also be used for so-called "run and gun" applications.

This means that documentarians, vacationers, but also local narrative formats as well as feature film producers can stock up on Sony. There is virtually a camera or audio solution for every application. Many of us know, for example, from terrible "entertainment" formats the wiring of the actors. Sony also offers this product. So it is generally evident that SONY is very intensive in this area and has many different product lines (see (6), (7)).

But what does this wing amount to in monetary terms?

The area of commercial distribution of these film products accumulates to a total share of 18.8% of SONY's sales. This figure is arrived at by adding two categories together. For a better overview, I list these categories from (8) completely:

Game sales (approx. 29%)
Multimedia products (approx. 21%)
Music production and distribution (approx. 10.3%)
Imaging and sensory solutions sales (approx. 10.4%)
Motion picture production and distribution plus TV broadcasting (approx. 8.4%)
Financial services (18.5%)
Other (approx. 2.4%)

If we add imaging plus sensor solutions to motion picture production, we get 10.4% + 8.4% = 18.8%. So Sony already has almost a fifth of its revenue through direct purchases in the above category. This is hardly surprising, because a simple look at source (9) already opens up a repertoire of various AAA blockbusters such as "Spider-Man", "The Three ???" or a film by Whitney Houston. You don't necessarily have to like the products - but a film budget of 150 million USD for a single film is quite a number (see (8), (9), (10)).

Is that really a lot?

Actually, it is for one film among many. I would have to come to you with the AVATAR films to show a significant difference. The first film, "Avatar - Departure to Pandora", cost $237 million, making it less than twice as expensive as Spider-Man as a AAA film. For the feel, the most expensive film to date had a budget of $430 million: "Pirates of the Caribbean 4: Stranger Tides." A Disney film. Second place with the Avengers also went to Disney. Sony's most expensive film to date is Spider-Man 3 with USD 298 million (see, (11), (12), (13)).

Why is this important?

As shown, SONY is quite competitive with the big players in the industry like Disney or Paramount Global, formerly Viacom, in terms of film budget (cf. (14)). However, the market is highly competitive and relatively cost-intensive, so that there is a great risk for SONY to be active and successful in this wing. An example: Spider Man 3 cost USD 298 million in 2007 (!). We know that - but it took in 1,017 million USD. That equals 719 million USD after deducting costs. Simple and clear to understand up to this point.

Now the problem: The multiple of the expenses is just 2.41.

The what?

The multiple of revenues compared to expenses. Quasi: What do I get back if I spend USD 298 million net after deducting costs?

To get back 2.41 times your expenses is certainly nice - but it has a decisive disadvantage: If it doesn't work out, the loss is enormous. Here, too, is an example: In April of this year, SONY released the film Morbius. The feedback to this film was - let's put it kindly - expandable. Massively expandable. Completely expandable. In need of rebuilding. I read through various reviews and almost all had in common that the short running time of 1 hour 44 minutes was praised. ....xD

This is really the only time I have to use a smiley in my analysis. But that was really a pure smackdown for this film (cf. (15), (16), (17)).

Yes, and what's the problem?

73.6 million USD. For reviews such as (17):

"There are no interesting characters."

"(The movie) falls apart at the halfway point due to its weak (..) laughable script"

(The movie collapses at the halfway point because its script is absolutely weak and ridiculous)

"Sadly just about every element of the film ends up dragging it down"

(Almost every aspect of the film is negative and adds up to a negative performance)

"Feels like a generic template"

(Feels like a characterless template with no personality of its own)

I deliberately chose these four official reviews. Especially the last comment shows that SONY massively flopped with its film here, as the script obviously convinced almost no one. In the end, the reviews range from 1 to 2 out of 5 points.

What has Sony earned with this?

A record. Just not a positive one, unfortunately.

A drop in revenue on the second weekend after release of almost 74% (!). In absolute figures from 84 million USD to 9.9 million USD. Not even double-digit profits anymore and that on the second weekend after release. On 4/13 Morbius had only 16% critic rating - both the revenue drop and the critic rating a pure crash (see (18)).

Why is this important?

As I hope I have let shine through, Sony is dominant in terms of equipment. However, when it comes to content production in film shooting, one is in the midst of great competition. There you are rather not in first place and this example shows that almost perfectly.

SONY's Morbius was released on April 1. However, April also saw "Sonic the Hedgehog 2" and another spin-off of "Fantastic Beasts: The Mysteries of Dumbledore" were launched.

Sonic belongs to Paramount Pictures and had a budget of USD 110 million approx. The film about Dumbledore belongs to Warner Bros. Both did better than SONY's own production (see (18), (19)). What does this mean now?

Sony is diversified in the area of cineastics, but also takes a greater risk with this. In addition, Disney has taken over all licensing rights to the Marvel films from Paramount, so that Iron Man, Captain America, etc. are now completely in the hands of Sony's biggest competitor (see (20)). This tends to be unfavorable for the almost 9% large share of sales from theatrical film production.

What does SONY do besides this film division?

To answer this question, we take a look at SONY's core business around game consoles, other multimedia, etc. in the following chapter.

2. analysis of SONY's core business

According to (8), SONY's core business can be seen primarily in game consoles as well as software sales. After all, these two areas account for 28.9% + 21.1% = 50% of Sony's sales. It is also exciting that the gaming sector has increased despite existing problems around inflation and the resulting rise in the cost of living. Specifically, we're talking about a 3.14% increase from JPY 2,656,280.00 to JPY 2,739,760.00 after all.

This still reads relatively positive - nevertheless, the gaming sector is thus the least increased sector of all business segments of SONY, if we leave the 2 negative ones out of the consideration. So, with total sales of $88 billion in FY21/22, it is a significant factor in SONY's overall picture, with the main sales markets almost all showing positive trends, but Japan of all places showing a negative result of -6.69%. For better illustration, sales per region according to (8):

USA (28% share) +28.44%
Japan (28% share) -6.69%
Europe (18.8% share) +approx. 3%
Asia Pacific (11.6% share) +33.38%
China (7.8% share) +1.08%
Others (6.1% share) +36%

We can see that the current share of regions is mainly on the USA as well as Japan. Europe follows in 3rd place, which is interesting because in the 2020/2021 fiscal year, Europe still had more influence with 20.2%. So while Europe fell, sales in the US increased from 23.9% to 27.9%. This means that the USA and Japan are equal in terms of sales volume, which is a first (see (8), (22)). How has this strengthening of the USA and weakening of Europe affected SONY?

Essentially quite positively for the company and shareholders and less well for potential buyers. A look at the P/E ratio for 2022 of 17.9 shows that SONY has never been as expensive measured by the P/E ratio as it is this year, if we look at the period 2020-2025.

In light of the Corona pandemic and SONY being one of the few companies that was advantaged by this because of its products, the 2020 P/E of 13.6 compared to 17.9 from 2022 is an interesting development. SONY seems to be relatively highly priced at the moment.

But what does the current share price say about that?

SONY is currently valued at JPY 10035.00 at the time of this analysis. In 2022, earnings per share were JPY 712. From this, we calculate according to (23):

10035.00 JPY / 712 JPY = 14.094

So we know that the current P/E ratio is about 14 times earnings. Those who have read my KEYENCE analysis know that the current P/E ratio of the NIKKEI 225 is 14.3 times sales. If we add the tech sector, the P/E ratio of the Japanese tech sector is 16.3 times sales. This is exciting as this sector is expected to grow by 9.3% and SONY with its current annual P/E ratio is only slightly above the average - and with the current P/E ratio even below this average (see (22), (24)).

What could this mean?

It means that with a stubborn look at the P/E ratio and the current valuation, SONY is somewhere between fairly valued to slightly undervalued in a sector comparison. In general, SONY is still slightly above the market. Therefore, in order to assess whether SONY is really that cheap, a comparison analogous to KEYENCE is a good idea. Here, too, I will try to determine a fair value, estimate the potential of the share and say 1.2 words about the dividend.

If you want to read and see more analysis from me, just follow me here at Getquin or on YouTube.

We first start with the value consideration of whether SONY's growth is fairly priced. We do this by using (25) to annualize the P/E ratio to annualized annual growth on a 7-9 year cycle. To do this, I annualize the growth based on Sony's sales excluding the Corona effect from 2021 to 2025, resulting in (cf. (23), (24), (25)):

=((12,567,813 million JPY / 9,999,360 million JPY)^(1/4))-1 = 8.71% annual growth.

This allows us to determine whether SONY's growth tends to be cheap or expensive. We calculate:

8.71% annual growth / 14.094 (calculated current P/E ratio) = 0.62

So, we have obtained the parameter 0.62. From a value of 0.9, we speak of a "discount to growth". Nevertheless, it is noticeable that SONY has achieved a relatively good value here. The comparison with KEYENCE shows that SONY seems to have a tendency to be more favorable in growth. An interesting piece of info at this point, because even though both are so close in terms of market capitalization, this step of the value calculation shows an entirely different picture. SONY's growth seems to be twice as favorable as KEYENCE's (0.33).

So let's go ahead and try to find a fair purchase price for SONY. I do this analogously to KEYENCE with the formula:

(22.5 * earnings per share * book value per share)^1/2

We get for SONY:

=(22.5 * 712 JPY * 5776 JPY)^(1/2) = 9619.33 JPY

However, the current price of SONY is 10,035.00 JPY. Thus, the maximum purchase price suggested for SONY according to the Value Method is lower than the current valuation. We calculate:

(10,035 JPY / 9,619.33 JPY) - 1 = 4.32%.

So, according to our approach, SONY is cheaper in growth, but overvalued by about 4.32%. This tends to be linked to many marginal circumstances and is not an absolute judgment. Nevertheless, if necessary, with ordinary methods, one cannot assume that SONY would be valued cheaply right now. At least if I concentrate on the pure company values and do not make a chart comparison. Before I do that, I still determine the intrinsic value of this stock.

We calculate:

Intrinsic value of the stock = (8.5 +2*annual growth rate) * earnings per share.

This results in:

=712 JPY *(8.5+2*8.71) = 18,455.02 JPY

Where is the problem?

We have just applied a value investing procedure with a focus on dividend and group stability to a company in the tech sector. Accordingly, the results should be taken with a grain of salt.

Finally, I take a look at the chart progression. Here, Sony does not fare well in shorter periods of up to one year, with a maximum loss in value of -38% in September of this year, while the Nikkei 225 was at a loss of 10.95%. At almost no point in the 1-year comparison SONY's performance was above that of the NIKKEI 225, which in itself is a strong underperformance against the market. If we add KEYENCE, SONY would be in good company with -30.34%. Yet this has not been a regionally problematic phenomenon. If we add in the NASDAQ Composite as a regionally-incongruous but industry-related index, it does even worse in September 2022, at an even -34%. What does this mean?

Tech stocks have fallen as expected due to interest rates and inflation among other factors
Regional differences are rather not performance drivers
The development is global
KEYENCE and SONY show comparable performance
SONY mostly outperforms KEYENCE slightly (approx. 5%) on average

2.conclusion

Fundamentally, we have now become familiar with SONY's product portfolio, know the impact of cineastics on SONY's sales, have been shown first film examples and have made a first comparison with KEYENCE.

Analytically, we have numerically calculated SONY's share potential, calculated a maximum price and put the P/E ratio in the context of the existing valuation.

For me, SONY is a very exciting investment case topic and I will be doing further analysis to gain a more informed understanding of SONY and its market. I find the stock fundamentally exciting and will therefore continue to analyze it to evaluate an expansion of my position.

In order not to go beyond the scope of this analysis, I have focused on selected points in this part. If you want to hear more about SONY in the market environment with Nintendo and Microsoft, write it to me in the comments!

A happy new year 2023 to all of you!

Your Bass-T

#tech
#sony
#playstation
#analyse
#dividends
#japan

https://youtu.be/IPpXjXaYvKU

Sources

(1) https://www.radioswissclassic.ch/de/musikdatenbank/musiker/430251eb2fbdd6769893a50ffaa2583160c/biography?app=true

(2) https://onlinebanken.com/wissen/japanische-aktien/

(3) https://www.finanztrends.de/top-100/japanische-aktien-nach-marktkapitalisierung/

(4) https://www.brandslex.de/markenlexikon/cover/s/markenlexikon-sony

(5) https://de-academic.com/dic.nsf/dewiki/2610088

(6) https://pro.sony/de_DE/home

(7) https://pro.sony/de_DE/filmmaking/run-and-gun