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Why Sony Is Not an Ideal Investment Candidate for Now

May 06, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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The investors of Sony (SNE) would not have only been disappointed but also worried after credit rating agency Moody’s Investor service downgraded its credit rating to Junk. The company has been downgraded by other agencies as well which has strongly put forth the lack of sustainability in its core business segments. As a move to combat the sluggishness in its overall business, the company has finally decided to do away with its PC business.

Bye Bye VAIO

In one of my last articles on HP (HPQ), I mentioned the rough time PC makers are experiencing because of the stagnancy in demand for PCs with the advent of tablets and smartphones. Sony was finding it quite difficult to deal with the extreme pressure of slowdown in PC demand especially because of the presence of intimidating players like HP and Lenovo. Hence, the company has decided to move out of the PC business for good by selling its VAIO division to Japan Industrial Partners, which will allow it to focus solely on its mobile devices and gaming consoles portfolio.

Revision of Consolidated Forecast

As per the information on Sony’s investor relations portal, the company has revised its forecast for fiscal year ended March 31, 2014. The reason for this revision is also the sale of its PC business which will entail an overall expenditure of 30 billion yen mainly on write-downs for excess components in inventory and accrual of expenses to compensate suppliers for unused components ordered for the company’s spring PC line-up. Additionally, Sony will have to account for 25 billion yen in impairment charges related to its disc manufacturing business because of contraction in demand for physical media in the European region.

Playstation Not Enough to Turn Around Sony’s Fortunes

Last year, Sony reached the pinnacle of success with the launch of its much-awaited gaming console, Playstation 4, which sold around 4.2 million units, ahead of its arch-rival Microsoft’s Xbox One. Though the sales figure remained short of management’s expectation of 5 million units, it was a big boost for the company because of the intensity of competition among the two giants.

Currently, the PlayStation 4 is doing exceptionally well. The new console is outselling both the Xbox One and Wii U, and the initial lead has been successfully carried on by the company. However, the success of this gaming console does not seem enough to compensate for the slowdown in other areas of Sony’s business. One of the poorly performing divisions for the company is Televisions, where once it ruled as a king. It is estimated by the management that the TV business will lose approximately 25 billion yen in this year because of a drop in demand across the globe.

Beware of Apple

In the smart devices sphere, Apple (AAPL) is a tough challenger for Sony as the company is badly struggling to maintain its market share.

After the mega launch of iPhones 5S and 5C last year, rumors are already coming in great numbers for the iPhone 6. While it is tough to comment on the reception of this much rumored iPhone, one thing that is for sure is that it is the most anticipated phone in the history of Apple.

In the first quarter Apple reported explosive results in terms of iPhone, iPad and Mac sales. The revenue surged 6% to $57.6 billion in the quarter with a commendable gross margin of 37.9% and diluted EPS of $14.5 per share. The focus of the earnings call was management’s outlook on the big partnership with China Mobile because of the massive size of the Chinese markets.

Bleak Business Prospects

While it is true that Sony is a clear winner in gaming consoles and its latest innovation Playstation Now, a game streaming system will keep gamers connected to Sony for a longer time, the company’s earning potential is represented by its core electronic products that is struggling.

The company has already lowered its estimates for the fiscal 2014 twice in the last few weeks indicating a not-so-good time for the investors. As per the warning from the management, the company might see its operating income come down to 26 billion yen from 80 billion yen (approximately $782 million to $254 million).

Final Words

Sony is an age-old company, but the revolutionary shift in consumer preferences and industry norms is taking a bad toll on its financial health. Hence, it is prudent to hold off putting money in this giant till there are some conclusive signs of building momentum in its dying business segments. Also, the stake sale related to VAIO might spark some volatility in the stock in the near term. Hence, it is advisable to refrain from investing in Sony.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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