As I have said in my previous articles, the era of smart devices has completely altered our lifestyles and though I cannot say if it’s for better or worse, one thing that can be surely said is that a host of companies have benefited in the process. However, for Sony (SNE, Financial), the ride has not been that pleasing as the electronics giant has continued to lose share in the smartphone market, to stalwarts like Apple (AAPL, Financial) and Samsung (SSNLF, Financial). Yet, analysts at JP Morgan and Deutsche Bank (DGZ, Financial) have upgraded Sony’s stock for its favorable position in film/TV, music and financial services operations.
Q2 highlights
The second quarter was a noteworthy one in respect of revenue growth and contraction of operating loss on a year-over-year basis. In the second quarter, consolidated sales increased 7% year-on-year to JPY 1,901.5 billion. Consolidated operating loss was JPY 85.6 billion, a deterioration of JPY 99.5 billion year-on-year, which was mainly due to the recording of a JPY 176 billion impairment charge for goodwill in the Mobile Communications segment. However, looking past this impairment charge, the company has definitely built strength across segments. Yes, the MC segment has been slacking of late and Sony’s forecasts in this respect also convey a similar story, but the other segments are gaining well and as per management’s address, it is clear that the company will pursue growth in these segments.
There is little doubt that Sony’s MC segment has been facing immense heat because of the competitive forces existing in the market. Both Apple and Samsung have exerted heavy downward pressure on Sony’s market share owing to which the company has seen a considerable contraction in demand. In the quarter prior to this, Sony’s Chief Executive Kazuo Hirai had admitted to the severe competition in the mobile industry, and, therefore, it is not a surprise to see a downward revision in the unit sales forecast from JPY 43 million to JPY 41 million. Also, Sony has downwardly revised the forecast for operating income in this segment by JPY 28 billion. Please note that this downward revision includes the negative impact of the appreciation of the dollar, as well as restructuring charges primarily related to reducing headcount by 1,000 in order to significantly shrink the size of the mobile business in China.
High on gaming
Though the MC segment is not exactly the goldmine for opportunities and revenue, it is the other upcoming segments of Sony that I am pretty optimistic about. One of these divisions is the Game & Network Services wherein the company revised the full year forecast for sales upward by JPY 50 billion from the July forecast. Sony’s latest gaming console PS4 has been a raging hit and has easily surpassed the sales of Xbox One by Microsoft (MSFT, Financial). As reported in this Geekwire article, Sony has shipped 13.5 million PS4s worldwide since last November. That’s a good chunk ahead of the 10 million Xbox One consoles that Microsoft has sold to retailers. To add to that, Sony on Thursday reported that the PS4 outsold the Xbox One in the U.S. for the 10th consecutive month.
Looking ahead, the coming Black Friday sales extravaganza will surely have a positive impact on overall sales of PS4. Though Sony has not offered some massive price cuts as compared to its rival’s $50 price cut on Kinect-less Xbox one, it is safe to assume that Black Friday sales will have a sizeable impact on Sony’s game sales.
Continuing on that note, it is significant for investors to know that Sony has already unveiled its new Cloud-based TV service, PlayStation Vue, expected to be commercially launched during the first quarter of 2015. The web-based television service allows users to access live TV and on-demand content without a cable or satellite service, the company said. Though the potential of such a service is difficult to gauge at this point, such a service is without doubt a big add-on to PlayStation because it tends to transform PlayStation from a mere gaming console to a web-based entertainment system.
Uptick because of entertainment
Speaking of entertainment, Sony is also looking to boost its movie and TV revenue by 36% in the next three years as it cuts costs and invests in potential hit films, including a new Spider-Man movie. Though the performance of Sony’s pictures segment was not extremely positive in the second quarter, the revised growth targets did cause a spike in the stock price. Sony is aiming at approximately JPY 1178 billion a year by the year 2018, and, with a seven to eight percent margin on the same, the income growth is expected to be phenomenal.
Final words
Currently, Sony is trailing far behind the likes of Apple and Samsung in the smartphone market and realizing that, the company has rightly shifted its focus to gaming, TV and entertainment segments. As an analyst, I am bullish on the stock because of its potential in these business areas and overall improvement in financials.
