EUR 850.00 For Business Accounts Only

Morningstar | We Cut Sony’s Fair Value Estimate to JPY 6,000 Because of the Headwind on Smartphone Business

We revise no-moat Sony’s fair value estimate to JPY 6,000 per share and initiate the coverage of Sony’s U.S. ADR with a $55 fair value estimate. The two major reasons cutting our fair value estimate are: 1) we lowered shipment forecast of image sensors as we expect that smartphone’s replacement cycle will be longer than anticipated; and 2) we consider that the operating loss of Sony’s mobile business will be larger, considering the intensifying competition in Japan. Meanwhile, we retain our view that Sony is making progress on establishing an ecosystem for its game consoles and digital camera businesses, which becomes a hook to prevent users switching to other platforms. We view that the ecosystem contributes solid cash flow to the company, which mitigates the trough of the platform cycle, and as a result, Sony’s profitability is much higher and more stable than in the past. Overall, we consider that Sony’s shares are currently fairly valued; the ongoing cycle of PlayStation and mobile games has peaked out, and thus, we believe that Sony’s shares lack a short-term catalyst.

Excluding the one time factor, Sony’s December quarter operating income was JPY 260 billion, which is 24% below the previous year, because of two major reasons: 1) revenue of Mobile Communications segment and Semiconductors segment did not reach our expectation because of weaker smartphone demand; and 2) larger promotion expense dragged down the profitability of the Game & Network Services segment. In particular, we are discouraged that profit of Game & Network Services segment was lower than the previous year, despite the larger user base and network sales. While we understand Sony’s strategy to increase the number of active users will help maximize the return from the ongoing PlayStation 4 platform in the longer run, we are concerned that promotion cost to maintain the user base might be larger than our forecast.

Owing to the weakness of smartphone demand, we lowered our fiscal 2020 operating income forecast for semiconductors segment from JPY 180 billion to JPY 140 billion, as we view that production utilization rate in the first half of 2019 will be lower than our original forecast, as Sony needs to control its inventory. Likewise, we revised our number for the Mobile Communications segment from JPY 300 billion loss to JPY 500 billion loss, as we estimate that Sony needs to cut approximately half of its JPY 160 billion expense to eliminate operating loss for the segment, and it will take longer time for the company to complete the turnaround.