Sony's PS4: The Fundamental Potential

| About: Sony Corporation (SNE)

There has been a lot of hype about Sony's (NYSE:SNE) PlayStation 4 (PS4) and the subsequent controversy of Microsoft's (NASDAQ:MSFT) Xbox One. Many believe that Sony has won this generation's console war, and component cost estimates say that the PS4 may not be sold at a loss (unlike Sony's previous consoles). Based on 2014 revenue estimates and past performance of Sony during a console release, the PS4 may return Sony's Game segment to the glory days of the PlayStation 2.

For simplicity, all dollar amounts are converted from yen to dollars at a current exchange rate of 99.45¥/$.

The Business Segments

Sony's eight business segments reported combined revenue of ¥6,720.60 billion ($67.58 billion) in the 2013 fiscal year. Each segments' contribution is listed below in descending order of revenue.



Percent of Total Revenue

Revenue by Segment (converted to $ in billions)

Mobile Products & Communication



Financial Services



Home Entertainment









Imaging Products & Solutions









While the Game segment only accounts for 10.5% of combined segment sales, the PS4 has the potential to add solid earnings per share and substantial revenue growth. In order to determine how much impact the PS4 could have, I created a model.

There are several of assumptions used to make this product earnings prediction. These estimates are made optimistically to show potential. First, we will assume a 40% sales growth for the Game segment. This is based off of the segment's 26% sales growth after the PS3 launch, but with less cannibalization of other products by the PS4 and the higher popularity of the console. We will attribute 75% of the Game segment sales to the PS4. While both the PS2 and PS3 were sold at a loss to penetrate the market, it has been suggested that the PS4 will not be. Therefore, we will use the target 5% margin set by Sony in their 2013 annual report. Sony reported that there were 1,011,950,206 shares outstanding at the end of the 2013 fiscal year.

We start with the Game segments 2013 revenue ($7.11 billion). After applying the growth rate, attributing the 75% of sales to the PS4 and multiplying by our target margin, we get per share earnings of $0.39 from the PlayStation 4.

Revenue and Operating Income

To see what the PS4 may be able to contribute to total Sony revenue growth, we will use this revenue forecast of $75.41 billion and the previously established high Game segment sales growth rate of 40%. Based on this, the PS4 (hardware, software, and other) could contribute $2.275 billion to Sony Group's revenue. Of the estimated $7.84 billion company revenue increase for 2014, that means the PS4 would account for 29% of growth.

What remains to be seen are the expenses incurred to bring the PS4 to market. The Game segment ran a $2.33 billion operating loss in the fiscal year of the PS3 release, 2007, and did not see an operating income until 2011. During 2001, the fiscal year of the PS2 release, Sony reported an operating loss $512.8 million. However, the Game segment then reported operating income of $834.6 million in 2002. A statement from Sony's CFO Masaru Kato states they are not planning a major loss with the PS4 launch.

Game analyst Michael Pachter believes that Sony will actually be making a profit on each console; about $25-$30. If this is accurate, then the Game segment may still post an operating loss due to necessary, but high marketing and research and development costs used to support PS4 sales.


Based on previous performance of the Game segment during past console releases, revenue estimates for 2014 and the popularity of the PS4, Sony's new console could play a substantial role in revenue growth and make a solid contribution to EPS. Keep in mind that there is ambiguity on how the PS4 will affect the Game segment's operating income, but a loss appears more likely for at least FY2014.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.