Global Senior Analyst, Fundamental Equity Research

Emile Farsoun

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony Corp (6758 JP)</a> has transformed itself from a household electronics conglomerate to an entertainment powerhouse, generating 67% of operating profit from Gaming, Music and Pictures.  In conjunction with this transformation, Sony has improved its EBITDA margin, over the past five years, by threefold to over 15%. Sony has also benefited from the rise of the Smartphone, with 1.5 billion sold annually,  which fueled  rapid growth in its Image Sensor business, which goes into the production of the Smartphone camera.The stock trades at very attractive multiples on FY1 P/E of 14.4, FY1 EV/EBITDA of 6.3x, and FCF yield of 8.7%, a steep discount to the entertainment peers.In our view, there are three main concerns weighing on the valuation; first, Sony has dominance in Image sensors, and the big question is whether competition will intensify from other semi companies, like <a href="https://www.smartkarma.com/entities/samsung-electronics-co-ltd" target="_blank" data-smartkarma-citation="entities:191:1" rel="noopener">Samsung Electronics (005930 KS)</a> and pressure the profitability. Second, concerns over the gaming franchise, with long term disruption to the PlayStation console business via Online Gaming. Third, the overall disruption in the distribution of content and whether this will have a negative impact on the value its content.We believe that these concerns are overblown and do not change our positive investment thesis for the stock. Our fair value for Sony is 9,000 yen, or 37% upside from the current level.

Sony Corp (6758 JP) has transformed itself from a household electronics conglomerate to an entertainment powerhouse, generating 67% of operating profit from Gaming, Music and Pictures.  In conjunction with this transformation, Sony has improved its EBITDA margin, over the past five years, by threefold to over 15%. Sony has also benefited from the rise of the Smartphone, with 1.5 billion sold annually,  which fueled  rapid growth in its Image Sensor business, which goes into the production of the Smartphone camera.The stock trades at very attractive multiples on FY1 P/E of 14.4, FY1 EV/EBITDA of 6.3x, and FCF yield of 8.7%, a steep discount to the entertainment peers.In our view, there are three main concerns weighing on the valuation; first, Sony has dominance in Image sensors, and the big question is whether competition will intensify from other semi companies, like Samsung Electronics (005930 KS) and pressure the profitability. Second, concerns over the gaming franchise, with long term disruption to the PlayStation console business via Online Gaming. Third, the overall disruption in the distribution of content and whether this will have a negative impact on the value its content.We believe that these concerns are overblown and do not change our positive investment thesis for the stock. Our fair value for Sony is 9,000 yen, or 37% upside from the current level.

Sony Corp

Sony Corp (6758 JP): Deeply Undervalued