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Why Gaming Giant Sony (SNE) Should be on Investors’ Radar

Zacks

One high-growth tech stock that is still thriving under the radar and should be in investors’ spotlight is Sony Corporation SNE — the Japanese gaming giant. Sony’s shares have appreciated 36.9% over the past six months, as it enjoys solid momentum in games, music, and home entertainment — its highest margin segments. This compares favorably with the industry’s rally of 23%.

Despite such impressive price momentum, the company’s trailing 12-month price to earnings ratio stands at 14.1, lower than S&P 500 Index’s PE multiple of 20.6. The stock is trading at a discount relative to its industry, which indicates that it is undervalued compared with its peers.


In the chart below, we can clearly see how the company’s steep earnings growth over the past year has outpaced the modest and gradual increase in share price.

The discounted valuation combined with the growth catalysts make this Zacks Rank #1 (Strong Buy) company an attractive pick right now. Let’s briefly discuss some of these growth drivers.

Growth Drivers

Sony is perhaps best known for its PlayStation gaming console, televisions and headphones. In gaming, the company has reportedly sold more than 75 million PlayStation 4 consoles since the launch of the line four years ago. The figure is almost double the estimated unit sales of Microsoft Corporation’s MSFT Xbox One consoles and quadruple of Nintendo Co.'s NTDOY Wii U console.

In fiscal third-quarter 2018 results, Sony’s Game & Network Services segment climbed an impressive 16.2% year over year. Burgeoning demand for next-generation video game consoles, explosion in eSports and the massive digital shift in the video game industry are tailwinds for the segment. Further, augmented and virtual reality might prove to be catalysts for Sony’s gaming business. Sony's VR products are set to capitalize on its existing base of more than 75 million PS4 users.

The company’s Music segment is benefiting from elevated Visual Media and Platform sales. In addition, Recorded Music sales are growing on the back of a steady rise in digital streaming revenues. Sony's TV business is also set to benefit from an industry upswing as more and more consumers upgrade to OLED and 4K screens. Home Entertainment & Sound segment is another strong growth driver for the company.

Semiconductors are riding high on demand for camera chips for smartphones, including Apple’s iPhone. Semiconductors carry robust margins and expanding image sensors demand for mobile products should boost its growth prospects.

Sony managed to chart positive growth in its operating segments in the third quarter of fiscal 2018. All in all, we can see that Sony’s high-margin segments are accelerating at a swift pace, which implies healthy earnings growth over the coming quarters.

In Conclusion

Sony has been firing on all cylinders to boost profits and results are slowly beginning to manifest themselves in better operating income and margin performance. Sony’s restructuring efforts and streamlined operations will help generate sustainable profit in the coming quarters, propelling future growth.

Clearly, Sony has its fingers in several pies and there are high chances that the company will soon become a tech powerhouse in multiple industries.

The industry trends are in Sony’s favor as well. The rise of autonomous cars and factory robots can help its semiconductors business move beyond smartphones. In gaming, soaring software and service revenues can extend the PlayStation 4 up-cycle and smoothen profits between new hardware launches. In fact, we believe that secular trends might make Sony a solid long-term growth story.

The company’s quarterly numbers have been surpassing estimates, while future projections are climbing higher. Sony has scored consecutive earnings beats over the trailing four quarters, with an average positive surprise of 79.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Further, analysts have also revised the company’s estimates higher in recent times. The Zacks Consensus Estimate for fiscal 2018 has gone up from $3.30 recorded a couple of months back to $3.86 today — an improvement of 17%. This indicates that analysts are feeling distinctly bullish about the stock.

We believe that this is be a great time for investors to consider this stock for their portfolio, given the discounted valuation and strong growth catalysts.

Sony Corporation Price and Consensus

Another stock worth a look is Snap-On Incorporated SNA, which carries a Zacks Rank #2 (Buy). Snap-On has an average positive surprise of 1.5% in the trailing four quarters, beating estimates all through.

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