One of the biggest news stories in the market over the past couple of weeks has been the shortage of semiconductor chips. This was likely caused by semiconductor manufacturers shutting down their factories at the beginning of the coronavirus pandemic. While these companies eventually started producing chips again, there has been a massive demand for chips from auto manufacturers and consumer electronics companies, such as Sony (SNE).
SNE had a huge launch with its PlayStation 5 (PS5), but many people are still having a hard time finding the console in stores due to the chip shortage. This brings up the question of whether SNE’s stock is still worth buying.
Sony has been a giant in the electronics industry for a long time. It created the first all-transistor television in the 1950s and was instrumental in starting personal music entertainment with the Walkman in the 1980s. Sony continues to make TVs and audio systems today but it is also actively involved in the entertainment industry, creating content, and manufacturing equipment. However its biggest growth driver right now is the PlayStation video game console.
Thesis for Buying
The PS5 console was launched in November 2020, and the company sold 3.4 million units within a month. Management believes this was the most successful launch in its history and expects to produce 18 million units this year. While the consoles themselves don’t make the company much money, as they are typically sold at a loss, they lead to massive revenue through software sales.
For every video game sold for the PS5, the company can receive anywhere from 33% to 100% of the game’s price. Revenue from the game’s sale goes to the game creator/publisher, the retailer, and the platform operator (Sony). If SNE publishes and distributes its own game, it keeps all the revenue. If it sells a third-party game, it keeps one-third of the sales. So, you can see how this adds up.
Video games are not Sony’s only revenue source. Its music segment benefits from healthy streaming revenues, and it recently introduced its 360 Reality Audio music experience. This allows listeners to feel like they’re immersed in sound from every direction. SNE also sees strong growth in its financial services division due to higher profits from its investments at Sony Life and Sony Bank.
Finally, the company is also dipping its toes in the electric vehicle market with the Vision S.
SNE has an overall grade of A, indicating a Strong Buy in our POWR Ratings system. While not typically considered a growth stock, the launch of the PlayStation 5 has resulted in a Growth Grade of B.
The company recently released strong financial results for the fiscal third-quarter. Revenues beat estimates and came in at $25.6 billion, up 9% year over year. Net income rose 62%. Its gaming and music segments drove the revenue growth.
Gaming and network services revenue grew 40%, and music sales jumped 22%. The game & network services segment benefited from an increase in game software sales and PlayStation Plus subscriptions. The company also raised its forecast for its fiscal year ending Mar 31, 2021.
SNE also has a Sentiment Grade of A, which means Analysts love the stock. The stock has also shown strong momentum over the near, mid, and long-term, resulting in a Momentum Grade of B. We also rate SNE by Value, Stability, and Quality, which you can find here. The stock is ranked #1 in the Entertainment – Media Producers industry. If you’re interested in finding other top stocks in this industry, make sure you click here.
While the chip shortage affects the company’s short-term production, I don’t see that as a reason not to consider the stock. As more factories open up and chip manufacturing increases to meet demand, SNE should be able to increase the number of PlayStations it sells. In the meantime, the revenue from video games and music should continue to support a Buy thesis.
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SNE shares fell $0.92 (-0.81%) in premarket trading Friday. Year-to-date, SNE has gained 11.82%, versus a 4.35% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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