Company Reports

As technologies and consumer preferences change rapidly, it is generally difficult for consumer electronics companies to build an economic moat. The replacement cycle for digital appliances is usually four to six years, but as most products are commoditized, it is difficult for manufacturers to build an ecosystem that prevents customers from switching to other brands. As a result, Sony’s profitability on electronics had been unstable in the past, while its music, movies, and financial services businesses have generated solid results.

Sony Group’s December quarter operating income of JPY 463 billion exceeded our expectation of JPY 430 billion, mainly due to the improvement in net gains from market fluctuations in the financial services segment, which are difficult to predict. Aside from this one-time factor, we believe Sony’s operating profit was largely in line with our expectations, with the lower-than-expected profitability in the game & network services segment largely offset by margin recovery in the imaging & sensing solutions segment.

We maintain our fair value estimate for Sony Group at JPY 14,500 per share, but our fair value per U.S. ADR is trimmed to USD 97 due to currency movements. While the PlayStation and the image sensor businesses did not meet our expectations, the shortfall is largely offset by the weaker-than-expected Japanese yen and robust sales growth in streaming music. Therefore, we largely maintain our earnings forecasts and our view that growth in the content businesses (games, streaming music, and movies) and the image sensor business will drive Sony’s growth in the medium term. Meanwhile, we are somewhat concerned that the long-term strategy of the game business is becoming uncertain as the restructuring of its game studios is underway and the pipeline of first-party games is being revised. Jim Ryan, president and CEO of SIE (Sony’s gaming division), who has been with Sony for about 30 years, has announced his retirement and a successor will be selected under the leadership of Hiroki Totoki, president of the Sony Group, who will serve as interim CEO of SIE. The long-term strategy for the game business will be formulated under the new CEO.

As technologies and consumer preferences change quickly, it is generally difficult for consumer electronic companies to build up an economic moat. The replacement cycle of digital appliances is usually three to six years, but as most products are commoditized, it is hard for manufacturers to build an ecosystem that prevents customers from moving to different manufacturers.

Despite somewhat disappointing June quarter results, we maintain our fair value estimate for Sony at JPY 14,500, while our fair value per U.S. GDR is lowered from USD 110 to USD 100 due to the weaker Japanese yen. The growth of PlayStation 5, or PS5, and image sensors is not as fast as we had expected, but we believe they will return to a growth trajectory in the next fiscal year. Meanwhile, our outlook for sales in the music segment to continue to grow along with the expansion of the streaming music market remains unchanged, and other businesses—consumer electronics and pictures—will maintain solid profitability with disciplined cost control. As a result, we are changing our Uncertainty Rating to Medium from High due to the improved stability and visibility of Sony’s earnings. While we lower our fiscal 2023 (financial year ending March 2024) earnings forecasts, we largely maintain our outlook for 2024 and beyond, and we view Sony’s shares as undervalued as the market is too pessimistic about the temporary slowdown.

As technologies and consumer preferences change quickly, it is generally difficult for consumer electronic companies to build up an economic moat. The replacement cycle of digital appliances is usually three to six years, but as most products are commoditized, it is hard for manufacturers to build an ecosystem that prevents customers from moving to different manufacturers.

Although Sony’s full-year operating income guidance for fiscal 2023 (new fiscal year ending March 2024) of JPY 1.17 trillion is about 10% lower than our forecasts and the PitchBook consensus of around JPY 1.3 trillion, we believe the guidance is conservative and reflects the cautious view of management amid economic uncertainties. In particular, we see some upside in two business segments, game and network services, or G&NS, and imaging and sensing solutions, or I&SS.

Based on weaker demand and the change in currency assumptions, we have updated our earnings forecasts for three consumer electronics companies, revising Panasonic Holdings' fair value estimate to JPY 1,400 from JPY 1,450, and Casio Computer’s fair value estimate to JPY 1,650 from JPY 1,800. Sony Group’s fair value estimate per U.S. ADR is revised to $110 from $100 due to the stronger Japanese yen, while its fair value estimate per share is maintained at JPY 14,500. As indicated by the change in our fair value estimates, we believe that Casio is the most vulnerable to changes in the business environment, leading to the largest downward revision in its earnings forecast. On the other hand, Sony has been able to minimize the impact of the economic slowdown thanks to structural reforms implemented by current management. We believe that Sony is the most attractive of the three consumer electronics companies from a risk/reward perspective, although we believe that all three stocks are undervalued and have 20%-30% upside to their respective fair value estimates.

As technologies and consumer preferences change quickly, it is generally difficult for consumer electronic companies to build up an economic moat. The replacement cycle of digital appliances is usually three to six years, but as most products are commoditized, it is hard for manufacturers to build an ecosystem that prevents customers from moving to different manufacturers.

While many other companies were forced to cut their full-year guidance due to the economic slowdown and rising costs, Sony Group was able to raise its fiscal 2022 (ending March 2023) operating income guidance from JPY 1.16 trillion to JPY 1.18 trillion. Sony’s results for the December quarter were impressive mainly in two ways. First, Sony was able to successfully cope with a challenging business environment. In particular, the electronics and image sensor businesses were able to minimize the impact of the economic downturn by improving their product mix, which we believe is a testament to Sony’s disciplined operations. Second, the games business, where user engagement had been declining for the past two years, showed signs of bottoming out. Overall, we believe that the solid results once again demonstrated the resilience of Sony’s business portfolio. We plan to revise our earnings forecasts and fair value estimate after meeting with the company later in February, but we maintain our fair value estimate of JPY 14,500 and our view that Sony’s shares are undervalued.

Although its game business continued to struggle, Sony delivered an impressive result for the September quarter. We believe that Sony was able to minimize losses from ongoing headwinds through its excellent management and operational capabilities, and as a result, was able to fully benefit from the solid demand for image sensors, digital cameras, and streaming music. We will revise our earnings forecasts as well as our fair value estimate after meeting with the company later this month, but we do not expect to make any material changes to our numbers. We still see Sony’s shares as undervalued, and believe the bottoming out of the PlayStation Network’s active user base will be the catalyst for the stock price.

In light of the slowdown in the gaming industry, we lowered our fiscal 2022 software shipment assumptions for Nintendo and Sony. We believe that consumer spending is becoming less active due to the uncertain economic outlook and that spending is becoming more skewed toward outdoor activities as the coronavirus begins to abate. As a result, we forecast that game shipments in our five-year forecasts for both platforms will not exceed the peak they had recorded during the pandemic. Nevertheless, we view both shares as undervalued and believe Sony has a larger upside to our fair value estimate as the market is underestimating the solid growth of digital content and the improving product mix of image sensors.

As technologies and consumer preferences change quickly, it is generally difficult for consumer electronic companies to build up an economic moat. The replacement cycle of digital appliances is usually three to six years, but as most products are commoditized, it is hard for manufacturers to build an ecosystem that prevents customers from moving to different manufacturers.

Amid various uncertainties, we are encouraged by Sony Group’s solid guidance for fiscal 2022 (financial year ending March 2023). In particular, revenue growth guidance for two business segments, the game and network services segment and imaging and sensing solutions segment, was much higher than we had expected. Based on the positive revenue outlook, we believe that Sony’s new operating income guidance of JPY 1.16 trillion, 1.9% up from the previous year excluding one-time factors, is conservative, which is not surprising in a time of great uncertainty. We plan to review our earnings forecasts after Sony’s business segment briefings, which will be held later this month. Nevertheless, we believe Sony’s shares are undervalued as we believe Sony’s business portfolio is much more resilient than the market seems to believe.

We fine-tuned Sony Group’s earnings forecasts and maintained our fair value estimate of JPY 15,000. While Sony’s December quarter operating income of JPY 465 billion was ahead of our expectation of JPY 363 billion, it was mainly due to the one-time factors, such as the JPY 70 billion gain from business transition and the smash hit of the new Spiderman movie, and we view remaining businesses as being broadly in line with our forecasts. We, therefore, maintain our long-term view that Sony will achieve solid growth for the next five years, driven by digital content such as games, streaming music, and pictures. Sony’s share price has dropped approximately 20% since mid-January not only due to the Russia-Ukraine conflict, but also because of the concern about its gaming business, such as Microsoft’s aggressive acquisition strategy and disappointing PlayStation 5, or PS5, console shipment in the December quarter. However, we believe that Sony will succeed in maintaining its PlayStation active users by leveraging its rich first-party games.

As technologies and consumer preferences change quickly, it is generally difficult for consumer electronic companies to build up an economic moat. The replacement cycle of digital appliances is usually three to six years, but as most products are commoditized, it is hard for manufacturers to build an ecosystem that prevents customers from moving to different manufacturers.

Sony Group’s shares plunged 13% on Jan. 19, after Microsoft announced it is acquiring Activision Blizzard, one of the biggest video game publishers. We view the purpose of the deal as to collect exclusive content to enhance its ecosystem, adding as many Activision Blizzard games as possible to Game Pass, which has 25 million subscribers. We view that the game platform industry is in the process of moving to a subscription model, which may be accelerated by Microsoft’s aggressive acquisition strategy. We think the decline in Sony’s share price reflects concerns that Sony’s winning pattern to date may be disrupted as the gaming industry is shifting from a console-driven model to a subscription model, and Sony may not be able to catch up with Microsoft in acquiring attractive third-party IPs.

We calibrated no-moat Sony Group’s earnings forecasts and raised our fair value estimate to JPY 15,000 from JPY 14,000. Sony’s September quarter operating income of JPY 318 billion was 0.2% up from the previous year and broadly in line with our expectation of JPY 313 billion. The company’s full-year operating income guidance is lifted to JPY 1,040 billion from JPY 980 billion, but we think this is still conservative as it incorporates a risk buffer of about JPY 40 billion due to chip shortages. Our new 2021 operating income forecast is JPY 1,130 billion, which is higher than the guidance, as we are more optimistic about the pictures segment and the imaging and sensing solutions segment. We believe that better-than-expected theatrical revenue and progress of cost-cutting activities will push up the profitability of the pictures segment, and solid iPhone demand and weaker Japanese yen will enable better profitability for the imaging and sensing solutions segment. Our new fair value estimate of JPY 15,000 corresponds to 19.5 times 2022 price to earnings, and we think Sony’s shares are currently fairly valued.

As technologies and consumer preferences change quickly, it is generally difficult for consumer electronic companies to build up an economic moat that generates sustainable excess returns on capital. The replacement cycle of digital appliances is usually three to six years, but as most products are commoditized, it is hard for manufacturers to build an ecosystem that prevents customers from moving to different manufacturers.

As technologies and consumer preferences change quickly, it is generally difficult for consumer electronic companies to build up an economic moat that generates sustainable excess returns on capital. The replacement cycle of digital appliances is usually three to six years, but as most products are commoditized, it is hard for manufacturers to build an ecosystem that prevents customers from moving to different manufacturers.