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  • Writer's pictureIshfaaq Peerally

SONY Stock Analysis - Buy Sony Stock ahead of PlayStation 5 Launch?

With the new PlayStation coming out in November 2020, it is important to look at Sony $SNE . Sony is, however, more than just a tech company. It also has a Music and Pictures business and a banking and insurance business. Sony is a diversified conglomerate.

Sony has 6 business segments:

1. GN&S (Gaming)

2. EP&S (Consumer electronics)

3. Music

4. Pictures

5. Sensors

6. Financial services

The consumer electronics business is the most important one for the time being but it is in decline as Sony sells less and less smartphones, TVs and digital cameras. The margins in this segment are also low and consequently, they cannot draw that much profits from this segment. With the pandemic the supply chain has been affected.

Sony is the world's largest company and one of the largest Movie companies. These two businesses are not growing that fast and Sony movies are generally less successful than those made by Disney $DIS but these are sustainable businesses and they will always be here for the long-term as people will always be listening to music and watching movies.

The Financial Services business has better margins than the average Japanese bank and insurance companies but margins are going down because of the negative interest rates of the Bank of Japan. This is not a good environment for banks to operate.

The most interest business segment is Imaging and Sensing. Sony also makes semiconductors and sensors and this business segment is growing at a very fast rate and has very good margins. 80% of the capital expenditure of Sony will be in this business in the coming three years. This is where we need to focus on, not really gaming.

The gaming business is still the most important one and this year, everybody is waiting for the launch of the PlayStation 5. The sales of PlayStation has been going down since 2016 and last year has been worse as people are now expecting the new consoles. Even Microsoft $MSFT are launching their new console, the Xbox, this year. But Sony has been able to have good revenues and profits because of the software business. Publishing games is more profitable than selling consoles.

Sony has a good balance sheet with enough cash to repay 80% of their marketable securities for this year.

The future of Sony is more and more dependent on gaming and sensors. Music, Pictures and Financial Services are more like hedges, keeping the business stable.

Are we going to value Sony as a tech company? we cannot really do that. Who are their competitors? Microsoft? Apple? Disney? Mitsubishi? All of them and even more. Sony stock is more correlated with the S&P 500 $SPX500 than with the Japanese index. That's because most of their sales are in the US and they are valued as a tech company.

Because most of the sales of Sony are international, the value of the Japanese Yen $USDJPY is very important. Last, the revenues of Sony were down by 5% in Japanese Yen but in US Dollars, that's only 1%. A weakening of the Japanese Yen will be good for the business of Sony since they are a net exporter. It is likely that the Japanese Yen will keep weakening with respect to the US Dollar and other currencies as the bank of Japan is printing a lot of money. With the bank of Japan owning most of the ETFs in Japan, the Japanese stock market is quite dependent on the actions of the bank of Japan. Therefore, if we're going to invest in Sony, we will need a big margin of safety. I'll keep Sony in my watchlist for the moment.

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