Let's crack open your music collection. Sony's got everyone from Aerosmith to Ricky Martin to Yo-Yo Ma. What's on the tube? Dawson's Creek. Seinfeld. Days of Our Lives. Ricki Lake.
Answer: The company that owns all these properties, including Jeopardy.
What is Sony, Alex?
Correct.
In the mood for a movie? Sony's the name behind recent classics such as Men in Black and Jerry Maguire. It is also setting the entertainment industry abuzz with the upcoming Charlie's Angels makeover and -- finally -- Spider-Man.
But what a web we've weaved. I haven't even gotten to products like the Vaio laptop computers or the D-WAVE wireless goodies. I haven't taken up the cry for Sony's media solutions and semiconductors.
In short, Sony is huge. Sony is everywhere you think it is. Sony is everywhere you think it is not. To put this into one final perspective, let's get into how dominating Sony is in cashing in on the human life experience.
Unlike many of its low-margin consumer electronic peers, Sony doesn't merely provide the hardware. Let's take something as simple as a Sony Hi-Fi VCR. You have a movie you want to see? Maybe an Elmo's World Sony Wonder video for your child? Or maybe footage you shot from your Sony camcorder. Shot on a Sony 8mm tape. Transferred over to a blank Sony VHS tape. To play on that Sony Hi-Fi VCR. Which is hooked up to your Sony Trinitron TV. Which you pump up through your Sony receiver and set of speakers.
This goes beyond Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %> selling low-margin razors to make it up in the blades. Sony excels every step of the way like no other company can -- or probably ever will. Its peers in electronics just don't have the capital, desire, or knowledge to build up an entertainment empire even close to Sony's arsenal. Meanwhile, it would never behoove creative media giants like Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> and Time-Warner <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWX)") else Response.Write("(NYSE: TWX)") end if %> to dabble in the low-margin components side of the business.
Put it all together and you have a dynamic company that should forever reign as leisure's ultimate one-stop shop.
So, OK, Sony the company rocks. Maybe you agree. But what about Sony the stock? Just how safe is it to own a foreign company? Well, let's clear that up first. Last year, a third of the company's revenues came from Japan. A third came from the United States. A third came from elsewhere. That's an amazing amount of geographic diversification. Plenty of domestic companies, such as McDonald's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %> and Coke <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>, have similar worldwide exposure.
What makes this interesting -- from the stateside perspective -- is that Sony is a company that ultimately collects yen. If the Japanese yen rises in value, the currency conversion makes the stock more valuable. If the yen falls, the foreign transactions translate into more yen. It neutralizes both ways, too, but it actually provides more fiscal stability than owning an American-based multinational.
Let's talk valuation now. Because of the company's wide spectrum of operations, it is hard to find the perfect gauge. What is Sony's industry group? Most would settle on the consumer electronics niche, but that's not exactly fair. Yes, it does make up two-thirds of Sony's sales. But last year it only generated 43% of the operating profit. This is low-margin turf. If you were to pit Sony against a company like Matsushita <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MC)") else Response.Write("(NYSE: MC)") end if %>, you would find two seemingly equal audio and video equipment makers with more than $60 billion in annual sales each. But Sony commands almost twice the market cap.
So it's overvalued? Not so fast. Because of Sony's higher-margin pursuits, its net profits are more than double that of Matsushita's. If we head out to the entertainment sector, things shine quite differently under the new spotlight. The company's price-to-earnings ratio (P/E) is actually in line with other members of the motion pictures peer group. Its price-to-book value is actually half of what America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> will pay to acquire Time Warner <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWX)") else Response.Write("(NYSE: TWX)") end if %>. Selling at less than two times sales, it might actually seem like the most unlikely of value stocks.
So, sure, the company is relatively cheap -- depending on the relative. What will serve as a catalyst for future growth?
Let's go out and say it: PlayStation 2. We are now just weeks away from the October 26 American debut of the video game console system that has already sold millions in Japan. Fitted with DVD capabilities and backward compatible to play most of the original PlayStation games, it's a slam-dunk winner as the holiday sensation for years to come. The market is already excited. Three of the largest video game makers -- Electronic Arts <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERTS)") else Response.Write("(Nasdaq: ERTS)") end if %>, THQ <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: THQI)") else Response.Write("(Nasdaq: THQI)") end if %>, and Activision <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATVI)") else Response.Write("(Nasdaq: ATVI)") end if %> -- have more than doubled in recent months, mostly due to the upcoming PlayStation 2 rollout.
The irony is that they are all rising because they are going to pay Sony a LOT of money. That's the beauty of having the top-selling video game system in the world. Every third-party title sold nets a few yen of royalty for Sony. That is why last year, despite waning demand as gamers held back for the new system, PlayStation made up just 9% of Sony's sales but 28% of its operating profits. In the past, it has made up as much as half of Sony's bottom line. With the mad rush between now and when a system typically peaks (four years from introduction), it's going to be dramatic high-margin growth for Sony.
And, yes, I did say DVD player. So that means it plays more Sony media (music and DVDs). And speaking of DVD, there is another fine catalyst. The consumer electronics market is driven by either same-product replacement (like when the VCR breaks down one too many times) or by innovation. The latter is the more lucrative option since it produces immediate incremental growth. With DVD players getting gobbled up left and right -- along with Sony DVDs to fill the library -- we are only at the beginning of another favorable trend for Sony.
Believe it. Record it into your Sony Walkman or MiniDisc and play it over and over again. Take a fresh look around you. Don't you like what you see?
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