The media’s most ignored stock: Sony COMMENTARY
Kazuhiro Nogi | AFP | Getty Images
Sony president and CEO Kazuo Hirai (L) shakes hands with executive deputy president and CFO, Kenichiro Yoshida (R), during a press briefing at the company’s headquarters in Tokyo on February 2, 2018. Sony chief executive Kazuo Hirai, who led a major and successful overhaul at the Japanese electronics giant, will step down at the end of March, the firm said on February 2 and will become Sony chairman.
Most people of my generation know Sony as the company of the Walkman and neon yellow headsets that we used to wear in the ’80s. It was the definition of cool. It was a giant in the consumer electronics world that obviously fell on hard times in the three decades since then, as Apple surpassed it.
Six years ago, Kaz Hirai replaced Howard Stringer as Sony CEO. Unlike Stringer, Hirai was a Japanese Sony insider who was very charismatic. He took over Sony at a time where there were no expectations. The company was in the $20 billion to $30 billion market-cap range — and was kind of an afterthought in the tech world. Sony’s peak market cap was around $180 billion in the late ’90s before the dot-com crash.
Hirai has very ably led the company through a very significant turnaround that — in the last five years — has led to a 231 percent gain in the stock. The shares are now worth more than $60 billion, yet it still doesn’t get much attention on business TV or in Hollywood compared with most of its competitors.
Sony has really executed its turnaround in the shadow of the bigger American tech companies that typically have a $400 billion to $700 billion market cap. You’re talking about a company that, even after this phenomenal comeback in the last five years, is only one-tenth the size of the big tech gorillas. I understand why it gets ignored, but I don’t think it should be for much longer.
There were some interesting things that came out of Sony’s earnings results nearly two weeks ago. It was another good set of numbers — the biggest quarterly profit in Sony’s history. It also raised its guidance for the year. Perhaps the biggest announcement was that Hirai would be stepping down as of this April, and he’s going to be succeeded by longtime CFO Kenichiro Yoshida.
Although Hirai deserves full credit for what the company’s done under his watch, a lot of investors have showered praise on Yoshida for his role in the turnaround.
Yoshida’s elevation to the CEO role now has sparked a lot of speculation about what this means strategically to Sony and which divisions he may sell off.
There are a number of divisions at Sony today.
- The gaming and networking division, which is home to the PlayStation. This is probably now the crown jewel of the company. PlayStation 4 is still the dominant console out there today, even with the rise of the Switch by Nintendo. Though it’s very far into the current hardware cycle, PlayStation continues to grow. PlayStation Network, which is the subscription component for people who want multiplayer access, has been a margin bonanza for Sony, and that increased significantly just in the last quarter — the operating income for the gaming network services division was up 35 percent compared with a year ago.
- Music. Sony is one of the three music publishers around the world today (along with Vivendi, which owns Universal Music Group, and Warner). All these publishers have benefited from the work that the music industry has gone through these past few years transitioning to digital and streaming services like Spotify and Apple Music. Those streaming services are growing significantly and have lucrative deals for those publishers. There’s a finite group of them that are really controlling the top artists. In the coming couple of quarters, we’re likely to see the Spotify IPO, which will put a greater focus on Sony’s music group.
- Sony Pictures — which consists of the old Columbia Pictures movie studio, as well as the TV production business, the IP associated with that content (e.g., “Wheel of Fortune,” “Jeopardy” and “Seinfeld”), and cable networks around the world. Just in India, the number of viewers for Sony’s cable networks has increased 400 million in the last year.
- Home entertainment and sound — this would be TVs, which are going through a bit of a renaissance now with 4K.
- Imaging products and solutions — a division that had some question marks going into this quarter from some analysts about whether a slowdown in iPhone X sales was going to have a significant impact on Sony and others who provide some of the imaging sensors in these high-end devices. (The division’s results ended up being fine, by the way.)
- Mobile communications — basically its phone unit, which has been a laggard for some time. Yoshida, as CFO, has taken a bunch of steps to try to stabilize things here.
- Semiconductors group — this has really been growing well in the last year.
- Financial services — a whole group of insurance products that most of us don’t think of when we think of Sony, but are still doing well. Just in the last quarter financial services operating income was up 27 percent year on year and top-line revenue was up 54 percent year on year.
Most investors give a lot of the credit for Sony’s turnaround to Yoshida. One of the things that he did when he came in was to put more transparency on each of those divisions. The outside world and investors were aware of divisional goals — that’s sparked a lot of improvement.
Yoshida also spearheaded selling off lesser-performing divisions. He got out of the personal computer business. He took write-downs where appropriate, including last year with Sony Pictures. The pictures division is riding a big hit this year with “Jumanji,” which was 20-year-old Sony IP.
Like most executives at Sony, Yoshida’s been there a long time. Before the CFO role he had a bunch of different roles, and one of the interesting things is that his successor as CFO is going to be someone he worked with closely in his last stint prior to getting the CFO job. So Yoshida’s elevation is part pat on the back for a job well done and part a doubling down on his turnaround strategy.
Yoshida said in his introductory news conference that directionally not much would change, but there would be some subtle differences. That’s sparked a lot of conversation in the media about what that means, and if he would look to unload the Sony Pictures division. That’s a division that they did a strategic review on two years ago, and Hirai reaffirmed Sony’s desire to keep the division.
But does Yoshida continue to believe in that division the same way Hirai did? There’s a lot of other moving parts in the media world right now, with Fox selling its assets to Disney. The conventional wisdom is that the number of studios is going to shrink. Most expect Sony would be a natural seller.