Thesis
One of my favorite stocks is Sony (NYSE:SONY) (OTCPK:SNEJF), and since I started covering it with a Buy rating, Sony shares have increased by around 6%. But after seeing the Q1 results, I’m becoming less optimistic about Sony. Despite an excellent overall performance, Japan’s top IT and entertainment business startled investors by lowering its FY 2022 projection. Additionally, one of the group’s core business areas, Sony’s Gaming & Network System sector, significantly underperformed the market and my expectations.
Given the problematic short- to mid-term macro and company outlook, I decrease my recommendation from Buy to Hold even though I still support a long-term target price of $116.67 per share.
Given the macro-challenges, Sony management stated:
“In addition to the Entertainment, Technology & Services (“ET&S”) and Imaging & Sensing Solutions (“I&SS”) segments, which have a relatively high degree of sensitivity to changes in the macro environment, we are paying close attention to changes in the business environment of all our segments including Game & Network Service (“G&NS”), Music, Pictures and Financial Services, and we are taking steps to mitigate risk when managing our business.”
Q1 Results for Sony
The Good
Consolidated revenues for the Sony Group from April through the end of June rose to 2.3 trillion yen, up approximately 2% from the same time last year. The group’s overall operating income climbed by nearly 10% to 307 billion yen in each case. Most significantly, these indicators show an absolute record for Sony Group and emphasize that, after decades of excellence, the corporation is steadily expanding and building value. About 218 billion yen, or 3% more than the previous year, was reported as Sony’s net income attributable to shareholders.
The Bad
According to a prediction by Sony, the group is expected to produce total revenues of roughly 11.5 trillion yen for the entire year 2022. This is just 100 billion yen (less than 1%) more than the management’s earlier forecast. However, the company revised its operating income outlook downward; it is now expected to total 1.110 billion yen for the year, down by roughly 50 billion from the previous projection. In that regard, Sony identified the primary drawbacks were macro-headwinds and a depreciating yen.
In addition, Sony’s Game & Network Services division, which contributes around 25% of the group’s overall sales, saw a substantial downturn in Q1. G&NS’s overall sales fell by around 2% yearly to 604 billion yen. Although Sony reported a “decelerating engagement” in gaming, the business cited favorable currency exchange rates as a positive. Most significantly, compared to the same quarter last year, PlayStation users’ overall gameplay time dropped by around 15% in Q1. Additionally, the business emphasized that involvement has been significantly lower than expected.
However, Sony saw a “substantial” decline in operating profit for the G&NS division, falling by 30.5 billion yen to 52.8 billion yen. Both reduced software/gaming revenues and more excellent content and game development costs put pressure on the segment. Additionally, Sony downgraded the G&NS segment’s FY 2022 projection due to the following reasons:
“The overall game market has recently decelerated as opportunities have increased for users to go outside due to a reduction in COVID-19 infections in key markets.”
Consequences & Recommendations
Overall, Sony’s Q1 results exceeded analyst consensus projections, but the firm let the market down with its guidance. Sony shares traded roughly 3% lower after the news, signaling that the company fell short of buy-side expectations given the group’s poor performance and prognosis for the gaming segment, one of the company’s hallmark business areas.
Following Sony’s Q1 reports, I have also become increasingly wary about the business’s stock. Even though I still believe that Sony will succeed in the long run because of the growing popularity of gaming, entertainment, and metaverse infrastructure and technology, I only see the short term. I envision the company facing short- to mid-term difficulties. Sony is anticipated to experience a few challenging quarters due to waning consumer confidence and multifaceted macro-headwinds. According to Sony’s Executive Deputy President and Chief Financial Officer, Hiroki Totoki:
“With the large-scale and rapid changes in the business environment this fiscal year, the risks and issues that need to be addressed are wide-ranging and diverse.”
Given long-term revenue growth and value accumulation, I will decrease my Buy recommendation to Hold and continue to support a target price of $116.67 per share, but I do not believe Sony will reach this price in the next 12 to 18 months.
Featured Image: Megapixl © Alexeynovikov
