We came across a bullish thesis on Sony Group Corporation (SONY) on ValueInvestorsClub by 08ird. In this article, we will summarize the bulls’ thesis on SONY. SONY’s stock was trading at $17.21 when this thesis was published, vs. a closing price of $19.42 on November 26.
SONY, a Japanese multinational conglomerate company, faces a massive change, with PlayStation and Crunchyroll leading the transition to a digital streaming company. These platforms are expected to generate more than $48 billion in revenue by the end of the fiscal year 2029. Playstation’s focus on engagement-based services is driving growth in repeated revenues and contributing to the user lifetime value, with its margin expected to increase to 17%. Crunchyroll, the biggest anime streaming platform, is also benefiting from the increasing popularity of anime across the world. These platforms position SONY well for high growth and improved profitability.
Sony
SONY is still undervalued even though it has undergone a complete metamorphosis. The market looks at the company as a traditional hardware manufacturer, which does not fully appreciate its entertainment aspect. The sum-of-the-parts (SOTP) analysis indicates that PlayStation and Crunchyroll alone are worth more than three times the current market value, with an intrinsic worth estimate of about $362 billion.
Interestingly, despite the entertainment segment being the largest revenue and operating profit generator for SONY, it still owns a valuation similar to that of pure-play hardware peers. However, with the company continuing to move away from hardware as it plans on spinning off its Financial Services segment in 2025, this disparity is expected to close and re-rate the company’s valuation.
Currently, SONY is trading below 6 times its +5-year EV/EBIT estimate, presenting a considerable investment opportunity. The company was valued at the EV/EBIT multiple of 14.5x for FY2023, but with the expansion of high-margin software businesses, it is expected to contract to 5.7x by FY2029. Nevertheless, there are still risks, such as lower-than-expected PlayStation 5 hardware sales and software sales ratios. However, moving to engagement metrics and the live-service games’ business model should offset them.
All in all, changing the business model of SONY is expected to deliver robust operating profit and EPS growth. On top of that, operating margin improvement and re-rating on the valuation front are also expected, making this stock a good bet for future returns.
While we acknowledge the potential of SONY as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SONY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: Stavros Tousios has no positions in the aforementioned stocks.
