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Summary

  • Shares down 18% in the last year.
  • Majority of business segments seeing growth and improving operating margins.
  • Addition of "Uncharted" and "The Last of Us" to movies helps boost strong pipeline.

Shares of Sony (NYSE:SNE) have struggled over the last five years, with a decline of 37%. The company has seen several of its business units post declines in revenue and minimal profits. Sony now looks attractive with shares trading under $20 and continued growth in the gaming and movie segment.

Sony continues its dominance in the current video game console cycle. The Playstation 4 is outselling Microsoft's (NASDAQ:MSFT) Xbox One by a wide margin. Through July 19, the Playstation 4 had a lead of 4.59 million units to 2.04 million units. The Playstation 4 has a market share of 56.9%, compared to the 25.3% and 17.8% for Microsoft and Nintendo's WiiU consoles respectively.

One of the possible reasons the Playstation 4 is selling well is some exclusive games it has for its console. One of those games is "The Last of Us", which is produced by Sony itself. The game recently passed the seven million sales mark and is doing extremely well for a first game in a possible franchise. A new remastered version of the game is coming this month and new downloadable content is also coming later this year. Thanks to the success and strong following of the video game "The Last of Us", the storyline will get an adaptation as a movie. Another popular franchise "Uncharted" is currently in the process of being brought to the big screen as well.

Whether or not "Uncharted" or "The Last of Us" will have strong box office performance is up in the air and always a risk with an entertainment stock, as production costs and marketing budgets can kill a movie's profitability and quickly affect the share price.

"The Last of Us" could be compared to game to movie adaptations like the Resident Evil series. The first Resident Evil movie, released in 2002, grossed only $40.1 million domestically. The highest grossing movie in the franchise was 2010's Resident Evil Afterlife, which grossed $60.1 million domestically. Another comparison for "The Last of Us" could be "I am Legend", which fared much better with Will Smith a huge box office draw. "I am Legend" grossed $256.4 million domestically.

I think "The Last of Us" could do well in theaters, due to its strong user base and continued popularity. A sequel game could boost the popularity and provide a strong lead into the movie adaptation. My guess would be for a $100 to $150 million domestic take. "Uncharted" will likely see its box office potential depend on who it gets to star. A big lead like Mark Wahlberg could lead to a $100 to $200 million movie.

The addition of "The Last of Us" and "Uncharted" as movies in the Sony backlog add to an already exciting lineup. Among the highlights are:

2015:

· Popeye

· Goosebumps

· Hotel Transylvania

· James Bond 24

2016

· Sausage Party

· Uncharted

· Angry Birds

· Smurfs

· Sinister Six

"Uncharted" jumps into the lineup for a huge June summer blockbuster date. In fact, the movie replaces the spot previously held by "Spider Man 3".

To date in 2014, Sony is the third highest grossing movie company with $914.4 million at the domestic box office. This gives Sony a 15.3% market share. In 2013, Sony ranked fourth with an 11.1% share and $1.2 billion in domestic box office revenue. In 2013, Sony released 31 movies, which was the most of any of the top ten movie companies. Sony saw only four movies gross more than $100 million at the domestic box office. Sony had the volume, but lacked the blockbuster hits in 2013.

Here is a look at financials for Sony's business segments:

Fiscal 2014 Revenue

Growth from Fiscal 2013

Mobile Products

$15.8 billion

+29.6%

Games

$9.5 billion

+38.5%

Imaging Products

$7.2 billion

-2%

Home Entertainment

$11.3 billion

+17.5%

Devices

$7.7 billion

-6.4%

Pictures

$8.1 billion

+13.2%

Music

$4.9 billion

+13.9%

Sony's 2014 revenue increased 14.2% from the prior year. However, profit tumbled, and was down more than 88% from the prior year. The company is forecasting revenue to increase a modest 0.4% in fiscal 2015, with profits one of the biggest focuses going forward. The company sees the mobile segment, already the largest for Sony, increasing its revenue 28.4%. The Games and Pictures segment, covered in this article, are expected to post gains of 16.9% and 6.1% respectively.

The risks in investing in Sony are the continued belief that the company's television and mobile business will perform well. The television unit is seeing a boost and the company thinks it will be profitable this year. A big risk is also whether or not the video game to movies transition will translate to top line and bottom line revenue growth.

Shares of Sony trade at under $18. This puts them towards the low end of their 52 week range ($15.23 to $22.25). In 2014, shares are up a small 3%, but trade well below their highs seen in 2013. Over the last five years, shares of Sony are now down 37%. I continue to believe that shares of Sony under $20 are a bargain and will be a slow but steady gainer for long-term shareholders. The company is focusing on profit and seeing strength in the majority of its segments. The runaway success of the Playstation 4 is still being played out and will impact growth and several units in the short and long term.

Source: Sony's Video Game Division Proves Upside And Will Boost Future Pictures Revenue