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Sony Bets on Video Games & Virtual Reality to Drive Growth

Zacks Equity Research
Updated

Sony Corporation’s SNE update on its mid-term business plan yesterday was essentially a mixed bag of factors, with bullish indicators on games and Virtual reality coupled with a muted outlook on the sensor and smartphone business.

The report emphasizes that with Chief Executive Kazuo Hirai at the helm, the electronics and entertainment conglomerate is staying strong on its recovery track. It is still working on new technologies such as artificial intelligence and virtual reality, and is also contemplating re-entering the robots space, a decade after discarding it.

Profit Targets Intact

Sony assured that despite growth concerns about some products, the company was on track to achieve its operating profit of more than ¥500 billion ($4.9 billion) for the fiscal year ending Mar 2018.

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The company has projected operating profit of just ¥300 billion for the current fiscal year (ending Mar 2017).

Growth Drivers

Sony touted its Games business as its strongest growth driver, encouraged by robust console sales, an increase in subscribers to its PlayStation network and the prospects of its virtual reality headset. The company has forecasted a profit increase of 52% to ¥135 billion this fiscal year in its games and network services business

In addition, Sony expects its videogames segment to generate revenues between ¥1.8 trillion to ¥1.9 trillion for the year ended Mar 2018, significantly up from a prior guidance of ¥1.4 trillion to ¥1.6 trillion.

Also, Sony has great expectations from the Virtual reality field, which allows it to leverage several of its capabilities like cameras and shooting, content production capabilities and entertainment assets.

The Flagship Product

Sony’s flagship PlayStation 4 videogame console has emerged as the fastest-selling game machine, beating rivals such as Xbox One from Microsoft Corp. MSFT and Wii U from Nintendo Co. Sony expects its PS4 consoles sales to rise 13% this fiscal year to 20 million units.

Release of blockbuster game titles coupled with a high-end version of the console will likely fuel PS4’s momentum.

Mr. Hirai was particularly positive about PlayStation VR, a virtual-reality headset system that is set to go commercial this Octoberat just $399. Sony’s pricing is in stark contrast with $599 for Facebook, Inc.’s FB Oculus Rift, which begins shipping at the end of this month, and $799 for HTC Vive, which will be available from early April next year.

The Downers

On the flip side, Sony admitted that it expects further declines in image-sensor sales, which have been suffering from slowing demand from high-end smartphone makers including Apple Inc. AAPL.

Sony had invested heavily in the image-sensor business and the slowing iPhone sales have really hit the segment hard. Consequently, Sony trimmed its sales outlook for the devices division to around ¥1 trillion from prior projections of ¥1.3 trillion to ¥1.5 trillion, for the year ending Mar 2018.

To Sum Up

Mr. Hirai has guided Sony through a tricky restructuring process over four years by shifting it from consumer electronics and divesting its Vaio PC brand. Sony is now focused on movies, games and network services, which has turned around its business and boosted profitability.

SONY CORP ADR Price

SONY CORP ADR Price | SONY CORP ADR Quote

Sony’s shares rose 4.3% in the trading session after the announcement, reflecting renewed optimism among shareholders. Sony has climbed over 19% so far this year, compared with S&P 500’s meager 1.3% gain.

However, Sony has been recently facing pressure owing to weaknesses in number of its businesses, namely, mobile and sensor which are expected to impact its financials in the near term. Factors like intense competition and weakness in cameras and image sensor business add to the company’s challenges.

Also, the Kumamoto earthquakes have significantly aggravated problems for this struggling Zacks Rank #5 (Strong Sell) company by hitting its Devices segment and IPS segments heavily.

Going forward, we expect Sony to continue shifting gears in its growth plans, reflecting changing trends of the fast-evolving industry.

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