Sony Earnings: Some Upside on PS5 and Image Sensor Businesses; Shares Undervalued

Although Sony’s 6758 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.

We will update our earnings forecasts and our fair value estimate after speaking with the company in mid-May, but we maintain our fair value estimate of JPY 14,500 and believe that Sony’s shares are undervalued.

Turning to the G&NS segment, Sony shipped 6.3 million PlayStation 5 consoles, the largest number ever in the March quarter, which is typically the off season. Sony was finally able to produce enough consoles to meet the massive demand as the component shortage has eased. Following the record quarter, Sony expects to sell 25 million PS5 consoles in the new fiscal year, which will also be the highest number Sony has ever sold in a single fiscal year. Sony guides JPY 270 billion operating income for the segment, up 8% from the previous year, assuming that game shipments remain flat in the new fiscal year. However, the plan seems conservative, given the improvement in user engagement and more attractive third-party games coming in the third year of the PS5 cycle.

In the I&SS segment, Sony estimates that the company’s global market share for image sensors has improved to 51% in fiscal 2022 from 44% in fiscal 2021. Sony lost market share due to Huawei’s retreat, but the company has increased shipments of large-size sensors to other Chinese smartphone manufacturers to meet their demand for higher image quality. We think the segment’s operating income guidance of JPY 200 billion, down 6% from the previous year, is too conservative, as we believe Sony will be the beneficiary of this trend.