After the introduction of the PlayStation 4 this week, many gamers have been raving over the console's new features. Sony (SNE) announced the PS4 would have the capability to stream newly bought games after the user downloaded a small portion of the file. This move shows Sony's transition into Cloud gaming, which could prove to be a quite successful venture. Many other features include much improved graphics, game sharing between users, and free streaming demos of games. I will admit these features could possibly help the PS4 regain some of its market dominance, but what investors really need to consider is what they are getting when they purchase a share of Sony. A very poor balance sheet, and a chain of losses reveal that not even the PS4 can stop Sony's slow decline.
Sony's business is comprised of a wide range of areas including:
- Consumer Products
- Professional, Device, & Solutions (Professional Services & Semiconductors)
- Sony Pictures
- Sony Music Entertainment
- Sony Financial Services (Bank & Life Insurance)
- Sony Mobile Communications
What immediately jumps out at me is that Sony's business is highly fragmented, and not focused on one core strength. Believe it or not, Sony Financial Services was the most profitable segment last year, compared to Consumer Products being the worst performer. By investing in Sony, investors are really investing in Life Insurance, the Music industry, and the Movie industry. Businesses that begin to branch out into other businesses and that begin to deviate from their core strengths often begin to face all sorts of problems. Just look at what happened to IBM when it decided it would be a good idea to try and make cheap hardware to keep up with other tech companies. The company almost went bankrupt. When the new CEO came in and switched IBM's strategy back to providing excellent customer service for its unique integrated solutions, the company began to thrive again. Sony's lack of focus will prove to be a big problem for the future.
Analyzing the Financials
After looking at Sony's financial statements, I noticed Sony hasn't actually produced a profit in over 5 years. That is plenty enough to convince me not to purchase the company. Sadly enough, it gets much worse when investors look at the company's balance sheet. Looking at the liabilities first, I noticed Sony has 1.8 trillion yen of bank deposits, and another 5 trillion yen of future policy benefits. That composes more than half of Sony's 11.37 trillion in liabilities as you can see below:
It is also very clear that Sony has a high exposure to securities and investments. According to the company's most recent filing, Sony has about 7 trillion yen in various investments, which makes up more than half of the company's 13 trillion in assets. After digging a little deeper, I noticed that almost all of these securities are made up of Japanese debt as you can see below:
(click to enlarge)All these debt holdings leave Sony enormously exposed to Japanese interest rates. If the economy begins to improve and interest rates rise, Sony will lose a tremendous amount of value because of this exposure. By buying Sony, investors are putting themselves into a position with basically 50% exposure to Japanese interest rates (7 trillion of Japanese debt / Sony's 14 trillion market cap). With this kind of exposure, investors should be very concerned with this investment decision.
Even though the PS4 could be a huge hit for Sony, the company's poor financials and large exposure to interest rates should deter investors away. There is also much more information the company plans to unveil on the PS4, and investors should also wait until they hear about the new Xbox. By investing in Sony, investors are really investing more in Japanese interest rates, rather than the PS4.