Sony Corporation (NYSE: SNE) is considering significant changes in the way it interacts with its consumer electronics segment after years of consecutive losses and increased pressure from its competitors. The tech powerhouse credited for raising Japan out of destruction following WWII, and introducing the first massively sold portable music-player to the world has been pushed out of the ring by popular substitutes to its core products.
More recently, Dan Loeb whose firm has a 6.5% stake in Sony, approached the company with the guidance to separate its outperforming entertainment division from the core electronics. While the company as a whole has benefited tremendously from the success of Sony Pictures, Loeb believes the electronics division could use a lot more focus and development if Sony ever plans to come back to its roots. With a separate IPO giving shareholders a piece of the entertainment pie, the company could acquire capital to restructure and gain an edge in competing with Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF). SNE rose 16% the day after Loeb's recommendation and the company is said to be working with Citigroup (NYSE:C) and Morgan Stanley (NYSE:MS) to pan out the potential offering. While it is still early to anticipate the ultimate decision of Sony's board of directors, CEO Kazuo Hirai has shown significant interest in reviving the company's electronics business.
From a quantitative perspective Sony Pictures alone raked in over $2.23 billion for 2012, and came in as the highest-grossing studio for the year. Solid performances by releases such as "Skyfall" and "The Amazing Spider-man" pushed the entertainment division to the top with a 30% increase in revenues from previous year. The Sony Music division reported operating profits of $396 million, funding over $7 billion to the company's overall profit in the last 10 years.
The company as a whole reported annual profits of $485 million on May 9, a massive reversal from the previous year's losses of $5.7 billion. The earnings were kept afloat due to the surge in USD/JPY currency pair, which ultimately aided international sales. In the past few years Sony has steadily reduced its operating expenses from $24.95 billion in 2011 to $22.50 billion in 2012. This figure however, was negatively impacted by the restructuring costs. Overall sales for the company resulted in $63.34 billion, which gained a positive influence from the +4.7% change in Yen.
Despite the negative performance, Sony still manages to remain relevant in foreign markets. Recent release of Sony Xperia mobile devices in Japan brought in sales growth of 8.2%. The new line is set to raise the benchmarks in durability and elegance for smartphones and tablets. Sony's research in numerous segments of electronics technology became the driving force in designing devices with integrated expertise from all of its specific divisions. Engineers for the Bravia TV line helped bring higher levels of clarity to the 5-inch 1080p display of Xperia Z, while the teams behind its Walkman music segment set out to enhance recorded sounds to bring out their intended notes for the audiophile's ears. Years of Cybershot experience paved the way for a 13-megapixel camera with Exmor technology to automatically take detailed photos even in low-light conditions, all present in the 7.9 mm water-resistant smartphone. Coupled with seamless connectivity to Sony's media devices and platforms, users can find a new all-in-one device to sync with their entertainment center. As Apple struggles to find new ways to revamp its slowing iPhone sales, Sony has potential to gain a new customer base in the market that is expected to be worth $150 billion by 2014.
One highly anticipated product from Sony remains the next generation of its PlayStation gaming consoles, expected to release later this year. Historically, Sony has maintained a glowing reputation amongst its gaming customers with market shares as high as 52.7% for PlayStation 3 in 2013, compared to 32.3% for Microsoft's Xbox 360. Released in 2006, PS3 became one of Sony's flagship products despite incurring losses of $1.97 billion for the fiscal year ending in March 2007. Initially, Sony had plans to bridge the loss with higher sales of videogames themselves, however, due to the initially large market acquisition by
Against Microsoft (NASDAQ:MSFT) and the more affordably priced Nintendo Wii, Sony failed to generate profits off consoles until 2009. As part of the next generation systems, Sony plans to create a more PC-like hardware interface, allowing for higher level of price control for parts. To stay competitive Microsoft also demoed Xbox One, the next generation of its gaming console with large entertainment integration to make it the go-to device for living-room TVs. Acting on the trend in the gaming industry, Microsoft also announced the shift towards cloud gaming and purchase of titles from an online store that sync with the player's account.
Despite the efforts to make cloud gaming attractive to gamers, the company received negative responses pointing towards restrictions on videogame resale and forced internet connectivity on users that may wish to play off the grid. Markets responded by surging SNE +8% the day of Xbox One's reveal while MSFT declined -2% over the next few days. With heightened innovation and slip-ups by its competitors, Sony Corporation has the opportunity to turn its fortune around and rebrand itself as the industry leader it once was.
Currently, Sony holds 50 and 200 day SMA at 18.04 and 13.78 respectively, while the stock trades at 20.42, three points below its 52-week high. For 2014, the company is expecting a rise in annual revenues of almost 9% with revised price targets as high as $24.77 for next year. Along with internal changes, Sony's chief financial officer Masaru Kato also believes the direction and forecasts for Japanese Yen into 2014 will boost sales for the company's products, which may result in positive surprise for overall fiscal earnings.