Sony Xperia May Make Sony A One Bagger In 2014

| About: Sony Corporation (SNE)

Sony (NYSE:SNE) is expected to release the Xperia Z1s on January 22nd. The latest Xperia device is exclusive to T-Mobile (NASDAQ:TMUS), and comes with cutting edge tech. Sony's device business grew by 39.3% year-over-year in the second quarter of its 2013 fiscal year. Sony's mobile business is the primary catalyst for earnings growth.

Sony Xperia Z1S

The Sony Xperia Z1S component wise is going to be about the same as the Sony Xperia Z1. The main reason for releasing a midpoint device is to keep Sony relevant, for when the Samsung Galaxy S5 comes out.

Source: T-Mobile

The device is pretty much the same with a couple exceptions. The metal band around the exterior was converted to plastic, and the device comes with 32GB of internal memory instead of 16GB. The device comes with an updated version of the software that prevents you from unlocking the boot loader, just in case you wanted to flash custom ROMs.

The device sports the Qualcomm (2.2 GHz Quad core) Snapdragon 800, Adreno 300 GPU (NASDAQ:QCOM), 20MP Camera, and a 5" HD (1920x1080) 441 PPI Display (TRILUMINOS). The device is exceptional, and while many reviewers felt that the screen wasn't as great as the Samsung Galaxy Note 3 (OTC:SSNLF), or the HTC One, I felt that the screen technology was the most superior amongst Android handsets. Just one look at the LCD display, and you'll notice that Sony's display produces the most realistic image, and a high level of brightness. High-end LCD displays can produce picture quality that's superior to the AMOLED display.

However, to be fair, Samsung worked on its OLED display, so that the brightness of the screen greatly improved from previous generations. Currently, the Galaxy Note 3's OLED screen has 360 nits (maximum brightness), Apple (NASDAQ:AAPL) iPhone 5S has 587 nits, and the Sony Xperia Z1S has 496 nits. The iPhone 5S has high enough pixel density, so that the individual pixels cannot be seen, and at the same time has the highest brightness among phone vendors. The Retina display comes with IPS (in-plane switching), whereas the TRILUMINOS display does not, Retina has the lowest/best Delta E RGBCMY and Delta E Gray Scale, which makes the Retina display from a real world performance context the best screen. On the bright side, the Sony display comes with the best color temperature (in Kelvins), and superior display software. Samsung's OLED technologies have the highest contrast, purest blacks, and lowest battery consumption (Samsung ships the biggest devices with comparable battery life).

So when it comes to display technologies it's definitely a toss-up between the Sony Xperia Z1S and the iPhone 5S. Granted, the Sony Xperia Z1S comes with the added benefit of being a bigger screen, which requires a larger pixel density in order to render pixels invisible to the naked eye. Apple avoided the problem of pixel density, by sticking to a smaller display. The pixel density of the Apple iPhone 5S is 326 ppi, whereas the Sony Xperia Z1S has a pixel density of 441 ppi. If Apple had a 5" screen the Retina would lose to the Sony Xperia Z1S in terms of picture quality.

I'm going to say that the Sony Xperia Z1S comes with the best screen at 5", and the Apple iPhone 5S has the best picture quality. The Apple iPhone 5s has a superior CPU, GPU, and software. Currently, the Sony Xperia Z1S is the best phablet in the Android ecosystem, and integrates with the PlayStation ecosystem. I think that the Sony Xperia Z1S is currently the best phone, for Android users as of the present moment, but that will change once the Samsung Galaxy S5 is released in Q1 2014.

Positive catalysts for the device

Many of you, who follow T-Mobile, know that there are tons of rumors swirling over Sprint's (NYSE:S) take-over of T-Mobile. Granted, if T-Mobile is indeed bought out by Sprint, then the Sony Xperia Z1S will be marketed on the Sprint network. I expect that in the event of consolidation, Sprint will be the brand name used for the consolidated entity. The 53 million subscribers on the Sprint network paired with the 45 million subscribers on the T-Mobile network will total to 98 million subscribers. So, Sony's potential market in the USA could more than double in size overnight.

Currently, Sony has been able to increase its market share to 5% globally, and has grown its handset sales by 62% year-over-year. I expect Sony to improve its global share significantly whether it uses Windows Mobile 8, or Android. That being the case, Sony's global market share figure could reach 10% in 2014 based on its historic growth rate. It's up to debate, whether that will happen as Apple has a very strong moat around the high-end, whereas Samsung's expected release of the Samsung Galaxy S5 in Q1 could give it an early start advantage. That being the case, many consumers perceive that the Sony brand is highly valuable, and is ranked as the 80th most valuable brand on Forbes. Sony's successful launch of the PlayStation 4 will marginally boost consumer adoption of the Xperia handset. That being the case, if Sony is able to sell to 10% of the Sprint/T-Mobile customer base in 2014, Sony's mobile sales in the United States will total to $5.2 billion assuming an average selling price of $528.

Assuming 5% to 10% global share and $300 ASP, will equate to $29 - $57 billion in annual revenue for Sony's mobile division in 2014. The $300 ASP comes from lower pricing in emerging market economies. My forecasted Sony mobile revenue is small when compared to Apple's $91.27 billion revenue from iPhone in 2013. I expect Sony to ship 85-190 million units; the low ASPs will reduce gross profit and net profit. In summary, Sony's mobile division at a 15% net profit would generate $4.35 billion to $8.55 billion in profit. Sony's market capitalization is $17 billion currently, and if the company does in fact earn that much profit, the stock will experience a massive rally. Deep down, I wish Sony would cut all of the unprofitable divisions, but unfortunately we're going to have to go with the conglomerate discount valuing the company at a conservative $43.50 for 2014.


Sony's mobile division is the primary upside catalyst. It would need to broaden the distribution of its handsets, and look for ways to target lower-end consumers in emerging markets to sustain growth. The high rate of growth in its mobile business indicates that consumers trust the Sony brand, and would happily spend money on a device built by the company despite Samsung's excessive marketing, and Apple's dominant application and product ecosystem.

However, my biggest concern has been Sony's weak performance across its other businesses (display, gaming, movies, and cameras). If Sony uses the profit from its mobile division to keep the other business divisions alive, we can kiss goodbye my optimistic earnings and price forecast. I'm not expecting Sony to earn a profit from its other division, but if it could at least break-even across the weaker performing segments, Sony could stand a decent shot at being a one bagger in 2014. In other words, 2014 could be the year that Sony rakes in billions of dollars in profit.

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.