Sony Corp stock: sum-of-the-parts analysis reveals massive rise (NYSE:SONY)
Sony group company (NYSE: SONY) is one of Japan’s most iconic companies. The giant has made a name for itself for making reliable consumer electronics, be it televisions, cameras and, most notably, its PlayStation game console. But Sony is much more than a consumer electronics company; its PlayStation business is now focused on software rather than hardware sales. It is also the world’s largest music company by revenue, larger than Universal Music Group NV (OTCPK:UMGNF).
His cinematographic activity has enjoyed great success, the latest of which was Spider-Man: No Coming Home, which has grossed $1.9 billion worldwide. Its Hawk-Eye computer vision system is used in many sports such as tennis, football and baseball to assist officials and provide analytical services. It also has a very strong semiconductor business.
In addition to its technology business, the company has a large financial services arm in Japan. Sony is therefore a leading company in games, music, scripted content, consumer electronics and semiconductors. Yet despite this, it has a market capitalization of $104 billion, far smaller than companies like Costco Wholesale Corporation (COST), The Walt Disney Company (DIS), and Salesforce Inc. (CRM). Sony generated more operating revenue in 2021 than these three companies combined.
This article will argue that Sony is undervalued and based on the multiples assigned to its competitors, the sum of the company’s coins would be at least 50% greater than its current market capitalization. I will use price/sales and price/operating profit in the valuation, as these are the two metrics Sony management communicates to investors when reviewing each business unit.
With Tencent Holdings Ltd. (OTCPK: TCEHY), Sony is considered the largest game company in the world. Its PlayStation console dwarfs that of Microsoft’s Xbox (MSFT). Its monthly PlayStation Plus Network users stand at 106 million, far more than Xbox users. Sony’s gaming unit generated more than $24 billion in revenue in 2021, compared to Microsoft’s $15 billion from games. The comparison with Microsoft’s Xbox is relevant given that both companies are the largest game consoles in the world and because they operate the app store business connected to these consoles.
Applying Microsoft’s price/sales multiple of 9.7 on Sony’s gaming unit would result in a massive ($24.4 billion * 9.7) valuation of $236.68 billion. A more appropriate approach would be to use multiples of operating income. Applying Microsoft’s price/operating earnings multiple to Sony’s gaming unit would yield a more reasonable price ($3 billion * 26) of $80 billion. One could argue that comparing the two on the basis of the multiple would favor Sony, given that Microsoft has phenomenal cloud business and better margins which increase its multiple.
I would certainly concede this criticism for the valuation derived on the basis of price/sales, but not that of price/operating income. This is due to two reasons: 1) The $80 billion valuation for the gaming business is only 15% higher than Microsoft’s valuation of Activision Blizzard Inc. (ATVI). It’s clear that Sony’s gaming business is larger than Activision’s, given that it’s the major console maker (mostly a duopoly) and operates the console’s app store. ; and 2) A 26x multiple for operating profit seems reasonable, given that Microsoft bought Activision for 20x operating margins. The second-largest game publisher, Electronic Arts Inc. (EA), sells for more than 30 times its price/operating profit.
Sony’s music business is the largest in the world by revenue, or the second largest if you count Spotify. It generated nearly $10 billion in revenue in its fiscal year that ended March 2021. In calendar year 2021, the company generated $9.5 billion in revenue, significantly more than those generated by Universal Music Group and Warner Music Group Corporation (WMG). The business is growing rapidly; Revenue grew nearly 19% year-over-year in constant currency in 2021. Music streaming revenue grew 37% over the same period in constant currency and currently accounts for 42% of sales.
Pricing for Sony’s music business is much simpler than for games, given that both of its competitors are state-owned companies. Universal Music Group and Warner Music Group are trading at a price/operating profit of 27.2 and 21.2 respectively. Sony’s music business made more revenue, operating profit and had higher operating margins than both companies in 2021. But to be on the safe side, I’ll assign the company the average price/ operating profit of its competitors of 24.2. This would give the music business unit a price of (24.2*1.9) of nearly $46 billion.
Sony has maintained a decent TV and film business after acquiring Columbia Pictures a decade ago. The unit generated more than $11 billion in revenue and nearly $2 billion in operating profit in 2021.
The company has two phenomenal movie franchises in Spider-Man and Venom. He also distributed and produced some of television’s most iconic shows like Seinfeld, Breaking Bad, Better Call Saul and The Crown. A smaller but significant portion of the unit’s revenue comes from a group of pay-TV channels it offers in the United States and overseas.
The company looks a lot like Warner Bros. Discovery Inc. (WBD), given cable exposure and strong film and television franchises.
It’s hard to say that Warner Bros. Discovery is trading on fundamentals, but applying its current price / 2021 operating profit to the Sony Pictures business would give the unit (3.7*$1.9 billion) a price of $7 billion. dollars.
Consumer electronics, semi-finished, computer vision system
I grouped consumer electronics, semi-finished, and hawkeye companies together because Samsung (OTC:SSNLF) can serve as a comparable company in pricing these units. These companies generated more than $30 billion in revenue in the company’s 2021 fiscal year. Operating profit was $3.3 billion. These 3 units have some of Sony’s most famous products, whether it’s televisions, smartphones, cameras or the Hawk-eye computer vision system used in tennis and other major sports.
Samsung is a good comp. to these units given the South Korean company’s similar business lines in consumer electronics and semiconductors. Samsung is currently selling at 7.45 times its 12-month operating profit. This would give Sony’s business units a price of (7.45 * $3.3 billion) $24.5 billion.
Bring it all together
Adding the price of all business units would give Sony a price of (80 + 46 + 7 + 24.5) of $157.5 billion ($125 per share), an increase of 48%. You also get the financial services business for free. This unit made $1.3 billion in operating profit on $13.7 billion in revenue in 2021.
Sony’s return on equity is in line with that of the average S&P 500 company. Its business has different types of barriers to entry that could allow the company to at least maintain its ROE in the future. Pricing the 3.9 book multiple that the average S&P 500 company gets at Sony’s current book value (3.9 * $39) would get a valuation north of $150 per share. Sony could also increase its book value by about $6 per share per year, meaning the book value could double at least every 6.5 years.
Further declines in general stock prices would likely lower multiples for comparable Sony shares. The valuation provided in the article leaned towards conservatism whenever the option existed, providing some margin of safety against any potential downside. Inflation could see Sony increase its capital expenditure, which could reduce the quality of the company’s operating result. Worsening economic conditions could see the company struggle to replicate its 2021 performance for some time, necessitating a drop in the stock’s valuation.