Sony: Several Content-Related Businesses For Less Than The Price Of Netflix

| About: Sony Corporation (SNE)


Sony PlayStation Plus has over 20 million paid subscribers compared to over 80 million at Netflix.

Sony PlayStation 4 console sales potentially up 25% in a recent six-month period to over 50 million.

In comparison, Netflix paid streaming subscribers up 7% over similar period.

Sony's various entertainment segments appear relatively undervalued compared to Netflix.

Sony (NYSE:SNE) is a conglomerate with business segments including financial services, home entertainment and sound, imaging and product solutions, semiconductors, pictures (motion pictures, television productions, and media networks), music, and game and network services.

Sony may not be on the radar of many North American investors. Perhaps, some view Sony as an electronics business that missed innovations such as Apple's (NASDAQ:AAPL) iPod, iPhone, and iPad.

Sony Entertainment Segments: More In Common With Netflix Than Investors May Think

If investors are viewing Sony as an electronics company, similarities to Netflix (NASDAQ:NFLX) may not initially come to mind.

Both companies compete in television streaming, sell digital subscriptions, and distribute original, exclusive content.

Sony has content deals with Netflix. The company licenses produced movies and TV shows to Netflix. Accordingly, Sony earns revenue from Netflix, and potentially benefits when Netflix performs well. For example, accordingly to Variety, ratings for Sony-produced Breaking Bad improved during its original run after the show became available on Netflix. An increase of Breaking Bad viewers arguably paved the way for Sony's spin-off, Better Call Saul.

Sony's Market Capitalization: Over 30 Percent Less Than Netflix

On Friday, December 23, 2016, Sony closed with a market capitalization of about $37 billion. Netflix closed with a market capitalization of $54 billion.

This means Sony trades at over a 30 percent discount to Netflix, based on market capitalization. Based on the operating income and quality of Sony's entertainment content assets, and based on PlayStation's growth potential, I believe Sony deserves a market capitalization closer to Netflix.

Digital Subscribers

Both companies have tens of millions of paid subscribers to digital content. In Sony's case, this includes subscribers to various services within its "Game and Network Services" segment.

At its Investor Relations Day on June 29, 2016, Sony reported almost 21 million paid PlayStation Plus subscribers. In contrast, on October 26, 2016, Netflix reported almost 83.3 million paid streaming subscribers.

PlayStation vs. Netflix Growth Rates

Netflix subscribers were up from about 77.7 million paid subscribers over the most recent two quarters, an increase of about 7.1%.

Slides from Sony's Investor Relations day did not disclose growth rates of PlayStation Plus subscribers. However, we can look at recent announcements from Sony over a six-month period and see that PlayStation 4 console sales may have grown by as much as 25 percent in a six-month period.

On December 7, 2016, Sony announced that PlayStation 4 worldwide sales (including the slimmed down PlayStation introduced in September 2016 and PS4 Pro introduced in November 2016) exceeded 50 million units. The company also announced 369.6 million copies of software sales.

That is a potential 25 percent increase in about half a year, based on the information provided by the company. The growth in console sales gives Sony an opportunity to significantly increase the PlayStation Plus paid-subscriber count since it last reported 21 million paid subscribers.

Further, Sony has recently launched PlayStation Vue, which allows the streaming of broadcast network and cable channels, including live TV and sports, on a variety of devices. According to Bloomberg, Vue had 100,000 to 120,000 subscribers in June 2016, which was within several months of it launching nationwide.

While it is early to evaluate the impact PlayStation Vue may have on Sony's bottom line, a skinny bundle of online cable channels obviously has the potential to compete with Netflix for viewing time and customers.

As Netflix, in my opinion, benefits from cord-cutting, Sony providing an alternative to cable TV may benefit Netflix.

In addition, according to Business Insider, Sony's PlayStation 4 has outsold Microsoft's (NASDAQ:MSFT) Xbox One and Nintendo's (OTCPK:NTDOY) Wii U. Sony also recently launched PlayStation VR, a virtual reality headset that can be used with PlayStation 4. Having the number one console should help Sony sell software, including VR software, for which it has a head-start over Microsoft and Nintendo. Further, if PlayStation VR sales lead to PS4 sales, that can lead to more subscribers within the PlayStation ecosystem.

PlayStation vs. Netflix Operating Income

In its most recent reported quarter, Sony's Game and Network Services segment, which includes PlayStation, earned higher operating income than Netflix's consolidated quarterly operating income.

For Netflix's third quarter ended September 30, 2016, the company reported $106 million in operating income. In contrast, Sony's Games and Network Services division reported $188 million of operating income in its second quarter.

For those who invest in Netflix because of its strong content, it's worth noting Sony Music also had greater operating income than Netflix in the most recent reported quarter.

Sony Music Operating Income vs. Netflix

Sony reported approximately $164 million of income in its Music segment in its most recent reported quarter. Record labels make money off licensing works from their catalogue, and also through "360 deals," in which newer artists pay part of their merchandising and touring revenues to the label. In other words, even though music content may seem less valuable in a world of illegal downloading and inexpensive streaming, money is still being made from music.

If readers think of Netflix as a content company in a world where content is king, Sony's music content generated more operating income than Netflix in the companies' most recently reported quarters.

Sony's Motion Picture and Television Production Growth Potential in India and Through Franchises

Sony has entered into an agreement to purchase a sports network in India. This may push Sony to reach 800 million potential viewers.

Sony owns the Ghostbusters, Breaking Bad, and Better Call Saul franchises. Further, it has a deal (reported by Variety) with Disney (NYSE:DIS), whereby Sony maintains the right to make Spider-Man movies, and Marvel has the right to use Spider-Man in its Marvel Universe movies, without either side paying fees for their respective Spider-Man use. (Marvel will receive payments at certain box office milestones, according to Variety's 2015 article). Spider-Man: Homecoming is set for release in July 2017, which may be a catalyst for Sony stock.

Sony's most recent release, Passengers, may weigh on the stock in the days ahead, providing a potential buying opportunity for long-term investors. According to Box Office Mojo, the film had a $110 million budget, and had an estimated domestic gross of $30 million as at December 26, 2016.

Sony's Consolidated Income Target

In Sony's most recent quarterly report, the company stated that by the end of the fiscal year 2018, it was targeting consolidated operating income of 500 billion yen. This works out to approximately $4.2 billion U.S. based on current exchange rates.

In contrast, based on its most recent third quarter report, Netflix reported operating income of $225 million in the first three quarters of 2016, and forecasted operating income of $125 million in the fourth quarter. That equates to $350 million of forecast operating income for fiscal 2016.

Using the metric of operating income, Sony projects, for the year of 2018, over 10 times the operating income of Netflix for fiscal 2016. (Note: I am assuming currency rates remain the same, while Sony may have different assumptions.)

Net Income Comparison

Analysts expect Netflix to earn $0.97 per share on average in fiscal 2017, according to Yahoo Finance. With 438 million shares outstanding, that would equate to about $425 million of net income.

Using Sony's reported fiscal year ended March 2016 numbers (in yen), the company paid a value equivalent to about 31% of its operating income in taxes. Sony also attributed about 30 percent of its income to non-controlling interests that year.

(Sony reported non-controlling interests of 40 percent in a Financial Holdings corporation it controls. On its most recent half-year and full-year balance sheets, non-controlling interests were listed at values equivalent to about 21 percent of equity, based on my calculations. I will use the above 30 percent of income number below as it is more conservative. Investors are cautioned to do their own due diligence to model the impact of Sony's non-controlling interests on any projection of its bottom line.)

If we use similar numbers (with the caveat that Sony is only offering guidance for operating income, and that non-controlling interests' share of net income may fluctuate from year to year), Sony could earn $2.0 billion U.S. dollars if currency remained constant in the next fiscal year.

That rough estimate would give Sony a forward P/E of about 18.5. According to Yahoo Finance, the one analyst providing a target for Sony's New York Stock Exchange-listed ADR estimates that Sony will earn $1.89 per share, resulting in a forward P/E of about 15. The analyst's number and my number are significantly less expensive than the Netflix consensus number of a forward P/E of about 130.


Relative to Netflix, which is placing its hopes mainly on video streaming, Sony appears to have a large number of future opportunities in the digital and content world at a significantly lower multiple than Netflix.

With its millions of PlayStation subscriptions; growth of video game consoles; a relatively new TV streaming service; and strength in music, film, and TV content, in a world where content is king, Sony appears to be undervalued relative to Netflix.

Even if some of Sony's opportunities, like virtual reality, don't live up to their potential, the company is diversified with many non-entertainment divisions. Further, the company should benefit from licensing its content as demand for content increases among current and future content-distributors.

As some of that Sony content is currently available on Netflix, current Netflix shareholders may wish to consider the merits of adding Sony to their portfolios.

Netflix reports earnings January 18, 2017, at approximately 1:05 (NYSEARCA:PST). Sony reports earnings on February 2, 2017, at 4:25 (NASDAQ:JST).

Disclosure: I am/we are long SNE, AAPL.

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.

Additional disclosure: The commentary expressed in this article is not legal advice, nor investment advice, and is subject to Seeking Alpha's Terms of Use. The author does not warrant the completeness or accuracy of the information or calculations within this article.

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