Morningstar | Diffusion of Online Content Business Lifts Our PlayStation 4 Forecast; Raising Sony FVE to JPY 6,800
We lift our fair value estimate for Sony to JPY 6,800 from JPY 6,000 as we revise our view on the PlayStation business. We had been underestimating the diffusion of online business, which will be the game changer of the industry, extending the console life and mitigating the trough of the platform cycle. As we revise our forecasts, profit from the game segment is likely to be much higher than we had originally anticipated. In addition, while we are concerned about Sony’s hardware businesses because of the economic slowdown and intense competition, we think hardware business domains are well disciplined on controlling costs and inventories, and thus the downside risk is limited. As a result, we've raised our operating income forecast for fiscal 2023 to JPY 950 billion from JPY 830 billion, which is the reason for our fair value estimate increase. While we believe strong fundamentals are mostly priced in, Sony’s share price has dropped more than 15% over the past two months because of concerns about the economic slowdown and the trade war, which makes it look slightly undervalued.We forecast that proportion of network revenue will be 66% of segment revenue in fiscal 2019, up from 20% in fiscal 2014, with approximately half of network revenue from add-on content and monthly subscription fees. Add-on content is new features added to existing games, delivering more entertainment, better game balance, and new challenges; this enables players to enjoy the same game longer than in the past and also enables game publishers and the platform provider to monetize longer and larger from the same intellectual property. In addition, membership in Sony’s monthly subscription service, PS Plus, had reached 34 million by the end of September, becoming another revenue source for Sony. Historically, profit of the game business has been unstable because of the console cycle, but we think diversified revenue will contribute to mitigating the trough.
Sony’s smartphone business has been the risk factor for the company over the past five years, recording an operating loss four times during the period. High-end smartphones are competing with Apple and Samsung, midrange to low-end smartphones are exposed to competition with Chinese makers, and the domestic market is threatened by Sharp. As a result, Sony’s smartphone shipments quickly dropped from 39 million in fiscal 2015 to 7 million in fiscal 2019. While we do not believe that the company can recover the profitability, the downside risk should be limited, as Sony is working on a restructuring plan to cut its operating expense by half and has already recorded an impairment loss for most fixed assets.
Sony is engaged in the development, design, production, manufacture, offer and sale of various kinds of electronic equipment, instruments and devices for consumer, professional and industrial markets such as network services, game hardware and software, televisions, audio and video recorders and players, still and video cameras, mobile phones, and semiconductors. Co. is engaged in the development, production, manufacture, and distribution of recorded music and the management and licensing of the words and music of songs as well as the production and distribution of animation titles. Co. is also engaged in the production, acquisition and distribution of motion pictures and television.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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