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Play Stations, TVs and Sensors

12 February 2020 by jbchevrel

Sony Corp (SNE) CDS has been trading below 40bp since the end of Q418 stress. Not the most eventful CDS in our universe. SNE adj. Net Income has been €3b-€6b equivalent since 2016, with EBTIDA €8.5b-10.5b eq. OCF is close to €10b a year, so with CapEx of €2-3b, SNE is left with €7-8b equivalent of FCF generated each recent year. Cash, equivalents and STIs reported on balance sheet have increased from ~€13b equivalent in 2014 to ~€25b equivalent now. The stock price has grown at a pace of ~+30% per year every year for the past 4 years. PlayStations (Games), Music and TVs have been reliable cash cows for SNE, over the recent years. Games have been generating €400-750m equivalent operating profit each quarter. The PlayStation 4 is still the most popular video game console of this generation (~100m units sold). The declining sales of PS4s are partly because we get PS5 soon and have been +/- compensated by digital games & movies sales, as well as subscriptions. The Game business has a stable customer base. The PS+ network had ~40m members as of the end of 2019, and this could save marketing costs to SNE on the occasion of the PS5 launch, planned for this year’s holiday season. Margins in Games are steady and the drops seen in Sales/Op. Income last quarter are largely due to lower revenues from free-to-play games. Going forward, one business risk for SNE Games is if competitors (Microsoft, Amazon, and Google) take games to the cloud. Music has been very stable as well, generating €170-350m equivalent operating profit each quarter. Those stable cash-printing segments have enabled SNE to invest more into areas of growth. Among them, camera sensors. With double-digit CAGR, this market is growing fast and SNE is very well positioned (~60% market share, far above the 2nd, Samsung, at <30%). Last quarter, image sensor sales have boomed +40% (! vs a year earlier) to €2.2b equivalent. At some point during Q419, it was reported by Bloomberg that SNE could not make image sensors fast enough to keep up with demand. That boom may well go on, helped by the shifts to bigger sensors and multiple cameras in smartphones. The basic iPhone 11 has now 2 cameras, and the iPhone 11 Pro has 3 of them. Google pixel 4 has a 12MP main sensor along with a 16MP telephoto camera. 2 is the new 1, until 3 is the new 2. SNE stock seems relatively favoured, in a context where people revert risk aversion seen on corona-virus and as SNE valuation looks relatively cheap at less than 12x earnings. Non-leader gaming company Nintendo is trading 22x its earnings, and they don’t do camera sensors…