Sony (NYSE:SNE), which remains in turnaround mode, is betting on PlayStation 4, which will include 22 new video games, as the focus of this year's holiday season. Meanwhile, its less glamorous divisions, such as music, continue to keep a low profile in the news. Video games have helped Sony stock climb throughout the year, although the stock has pulled back from a summer 2013 high of $23 per share.
Video Game Competition
PS4 will be competing with the new XBox One from Microsoft (NASDAQ:MSFT), along with last year's Nintendo (OTC:NTDOF) Wii U this holiday season. But since PS4 will be $100 cheaper than XBox One, consumers may gravitate toward Sony's $399 upgrade while the seven year old PS3 remains priced at $199. The new PlayStation is leaner with a new controller and has 10 times more processing power, using AMD (NYSE:AMD) chips, allowing better screen resolution and faster frame rates. In the last round Xbox 360 software beat PS3 in sales worldwide.
Sony's target sales for PS4 will be 5 million units by March. Some analysts, however, predict that the updated console will lose as much as $150 per unit. But Sony Computer Entertainment President Andrew House insists these forecasts are exaggerated, although he has failed to predict a net gain. Sony desperately needs to increase its 30 percent market share in video gaming, which lags behind Microsoft. Sony says it has 1 million pre-orders for PS4.
Disappointing Q3 Hammers Stock
For the quarter ending September 30, 2013, SNE disappointed investors with a $181 million operating loss and a 40 percent lower guidance for annual net profit. The good news was that sales increased both year over year and the quarter sequentially for video cameras, digital cameras, smartphones and even PCs. The company also saw sales increases for computer entertainment systems, portable entertainment systems, software and even music. Losses came from pictures, imaging products and devices.
One of the red flags that investors didn't want to hear in the report was Sony's statement that their electronics business is "declining beyond expectations." In addition, net income before taxes fell nearly 70 percent from the previous year's third quarter. The stock sunk on heavy volume as a result of the loss and guidance news, falling from above $19 per share to below $17, but it has since recovered. The stock opened the year below $10.
Despite Sony's amazing history with innovative products, it's not really the leader in electronics anymore. Apple (NASDAQ:AAPL) is the real winner in that space, although it does not directly compete with all of Sony's products, while Microsoft is still the champion of video games. Sony also lags Universal Music Group in music sales. It simply isn't the force it was last century and has failed to keep up with more innovative brands.
The company has not satisfied investors yet with its turnaround strategies and has yet to position itself as a company of the future. Even if PlayStation 4 is a hit, chances are it won't make a big enough splash to excite investors. In the new century innovation is what propels stocks skyward and Sony simply hasn't announced anything yet that allows for that potential.
It's not as if the company is failing so badly that it will get squeezed out of the market in any given division. Even though retained earnings have slipped from 11.2 billion to 112.2 million in the latest earnings report for quarter to quarter, which has been a downward trend since 2010, Sony has enough bright spots and cash to stay relevant for many years. It's just not what it used to be.
Sony does not appear to be a long term buy for investors who want to see significant returns, although it seems safe for dividend investors. Like Microsoft, it just isn't the high flying technology winner it once was. Excluding the 1999 tech bubble, Sony hasn't been much of a high climber since its heyday from the mid 1980s through the mid 1990s. The stock may rise this decade on the strength of video game consoles and software, but it still needs to report convincing solutions about how it will compete in other divisions.
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.