Sony Corporation (TYO: 6758)

Curtis Cifuentes outlines our investment thesis for Sony Corporation, our stock pick for the Future Generation Virtual Investment Forum 2020. As a Future Generation Australia global fund manager, we do not charge management or performance fees, allowing Future Generation to invest 1% of assets to its supported charities each year.

Many may, wrongly in our view, see Sony as a company beaten at its own game by nimbler and more aggressive Korean and American competitors in consumer electronics. We, rather, see a company that has managed to put pride and hubris behind it and instead focus on its strengths, creating a more profitable, resilient business that we believe is underappreciated by investors.

Firstly, and most importantly, Sony has focused resources in areas where they have competitive advantages, some of which include:

Games – Sony is the undisputed leader in console gaming today and is launching the PlayStation 5 in late 2020. Many have predicted the demise of console gaming over the years (firstly due to PCs and then smartphones), and while we are not ignorant of the risks of cloud-based gaming, we believe the strong exclusive game line-up and signs of pent-up demand will lead to another successful launch for Sony. We think Sony has learnt some lessons from the smartphone industry too, introducing subscription services as well as incremental hardware updates, both of which reduce earnings volatility.

Music – Sony is one of the three large global music publishing labels, an industry that is now emerging from a painful decade that saw inflation-adjusted revenues halve with the shift away from physical media. Music publishers earn highly defensive recurring revenues by controlling and charging for access to catalogues of music. Today more and more people enjoy music through streaming services, which has seen industry revenues return to growth.

Image Sensors – Sony’s semiconductor division is today the world’s largest supplier of smartphone image sensors, with image quality improvements being one of the major selling points to smartphone buyers. Sony’s image sensors are industry leading, making them critical suppliers to smartphone manufacturers, including Apple, and the market is not exposed to the commodity dynamics we see in other components like memory. There is also future optionality in autonomous driving and other automotive applications.

Lastly, Sony has exited or restructured loss-making and uncompetitive business such as consumer electronics, eliminating a source of, occasionally large, losses.

We feel Sony is a resilient collection of strong businesses, in many of which Sony is the global leader, and is benefitting from new-found management focus that is yet to be fully appreciated by investors. Sony is trading on 16x operating income, which compares favourably to peers, but we believe upside will be driven by profit growth in the divisions mentioned above.