Could Sony Stock Have a 54% Upside?

Thanks to last week’s surprise profit during their Q1 FY16 earnings report, investors have been bullish again on Sony’s stock, a sentiment that’s been ever increasing the past year. Isabella Zhong writing for Barron’s:

 Shares are up around 2% today following the company’s stunning June quarter earnings beat last Friday. The stock has rebounded 12% this year after having plummeted 35% in the second half of 2015. 

So why the rise in sentiment for Sony? Entertainment.

 ‘Quarters and years ahead look very promising,’ notes Goyal, who is the most bullish Sony believer among analysts. He reiterated the stock as a favorite Buy idea on the excellent results and raised his target price from JPY5,100 a share to JPY5,150 a share, which implies a hefty 54% upside. 

According to Goyal, another reason to dip into their stock is due to the management Sony has in place.

 Management keen to add value: We have long highlighted how Sony’s CFO continues to add value by: (1) making Sony focus on businesses which are operating in oligopoly / duopoly markets (Games, Movie / Music, CMOS), (2) Reducing / exiting exposure to commodity markets (like TV, Mobile, PC etc.), and (3) keeping tight control on what used to be exorbitant SG&A. Unlike some other companies, Sony doesn’t have treasure trove of IP. In case of Sony, all the credit goes to the management which has proven to be one of the most competent and willing management in Japan, working hard to create shareholder value (unlike some of its peers). No doubt Sony shows up at #1 rank in Jefferies Corporate Governance study. 

For us hardcore Sony fans, seeing the company retreat from categories like the personal computer and far decreased presence in mobile is a hard thing. After all, Sony used to be THE electronic maker throughout the world that the brand name itself would sell the product after which the quality and experience would ensure repeated purchases from that same customer.

But within this drastically different landscape, Sony, like many others, finds itself unable to compete and under the new management, Sony is wisely choosing profits over the ‘moral need’ to stay with a certain product line or division.

Frankly, one of the best moves Sony ever made was to sell off VAIO. As somebody who has owned multiple VAIO’s, the truth is that the PC market is dead. Sales have been declining for nearly a decade and what sales exist come with little to no profit and likely even at a loss in hopes of making something through other services attached. Why should Sony want to play in that market?

Unfortunately for Sony, Android is now PC – a device segment that turned to a race towards the bottom. Besides Samsung, you know whose making money from Android? Nobody. I’m not arguing they need to exit the mobile space, but their strategic retreat makes sense. Why sit there and continue to bleed money?

Now, I believe that, under the right plan, Sony can carve out a small space in mobile that can be both lucrative in the short term and give them more options in the long term as our phones continue to be the hub to so many satellite products/businesses like wearables, smart homes, and AI – unlike the PC market which will continue to shrink.

So does Sony have a 54% upside? I don’t know – I’m not an analyst. But what I can say is that, from a business perspective, under Kaz Hirai, Sony has been executing a very thought out strategy that seems to be paying off. After all, it’s been under Kaz that we’ve seen PlayStation become such a dominating brand once again. Maybe somewhere in there, he’s also laying the groundworks for other divisions to become breakout stars as well.

Discuss:

Do you think we’ll see a resurgence in Sony over the next few years?