I Love My PS4, But I Stick With Microsoft For My Portfolio

About: Sony Corporation (SNE), MSFT
by: The Dividend Guy

SNE built an impressive reputation during all these years of operations.

The "PlayStation Environment" is their greatest growth vector.

I don't see the point of going with SNE when you can invest in Microsoft.

When people are shopping for electronics, Sony Corporation (NYSE:SNE) often comes to mind. Whether you are buying a new TV or headset, they have got you covered. SNE has built an iconic brand that crosses generations. I still remember my first Walkman (nope, it wasn't yellow!). I bought the first generation of PlayStation and continued until I bought the PS4 for my teenager.

I did this analysis upon a few readers request. I thought it could be fun to see an alternative to the classic play on Microsoft (NASDAQ:MSFT). While Sony shows some great growth vectors through its PlayStation ecosystem, it's not enough for me to pull the trigger.

Source: Pixabay

Understanding the Business

SNE built an impressive reputation during all these years of operations. Sony is a conglomerate with consumer electronics roots and various well-known brand names, such as Walkman in portable audio players, Vaio in PCs, Xperia in smartphones, Cybershot and Alpha in digital cameras, and PlayStation in video game consoles. It currently has nine main business units, operating electronic appliances, games, devices and semiconductors, entertainment content, and financial services.

Source: Sony Group Summary 2018

SNE has also cultivated a strong culture within their employees. Based on innovation, diversity, integrity, and sustainability, the company relies greatly on its human resources to bring more new ideas to the market each and every day.

Growth Vectors

With such extended segments, SNE has room to improve many aspects at once. One, a broader approach, the company wishes to reinforce their Direct to Consumer (DTC) services. The goal behind is to create a whole community who shares the same vision as them. This will also allow SNE to connect the end users to the creators and developers of their products. Electronics fans all over the world do crave for a special bond with those companies, which could now be achieved.

On a product-based approach, the Game & Network Services such as PlayStation Network (PSN) and all of its linked products (Now, Vue, VR, Music, Video) are expected to grow, strengthening their IP content. Branded Hardware (Sound systems, televisions, and mobile) is also expected to be the real profit driver behind the big figures. Profitability will be on the radar for SNE as competition also targets higher-end products, usually leading to higher margins.

Sony recently announced a new partnership with competitor Microsoft and this could be a game changer. Both companies working together for the next generation of the gaming system will be massive. The next generation of PlayStation will be a complete entertainment machine. With streaming, virtual reality, and artificial intelligence coming into play, Sony should be able to push its revenue higher for several years.

Dividend Growth Perspective

I'll admit, SNE dividend history is not the shiniest one and I was even a bit reluctant to look at this stock. When you consider dividend-paying tech stocks, you have many other options than SNE.

When you look at it from a North American perspective, you realize that you won't fund your retirement plan on this one:

Source: YCharts

SNE barely pays a dividend which makes its yield (~0.27%) ridiculous. The valuation using the DDM model doesn't work (I really wonder why…). While SNE is a good company, why would you not go for Microsoft instead? I personally prefer the PS4 (yes, I'm a part-time gamer), but the MSFT dividend growth profile is a lot more interesting.

Potential Downsides

I will let aside SNE's first concerns regarding product quality and customer satisfaction since I feel every business in this industry is equally impacted by their own doing. The downside regarding the product is that they need to keep innovating through their product lineup. The rapid evolution is a problem that most electronics giants face nowadays. You can definitely become obsolete in a matter of a couple of years. You can see how quickly Nintendo lost its dominance in the gaming industry once the first PlayStation got out.

In order to keep the sales volume up, they need to bring new products, hence investing in R&D and marketing, which turns to be a "money-hungry" pit. We are talking about several billion each year.

Another possible weak link in the chain relies on "other partners". As many of you know, a tech giant doesn't produce their products from beginning to end. Some of the work is done by third-party suppliers, service providers and all other partners SNE may have. This means the company also relies on its timeliness, product quality, and general contracts guideline to achieve their goals. This may also translate to additional legal fees, time-consuming, and some more quality checks.

A comparison with Microsoft

The comparison isn't perfect since Microsoft is first and foremost a software company while Sony focuses on electronics. But since they both offer gaming platforms and they are both "old tech" paying a dividend for a while, I would likely have to sell my MSFT shares if I wanted to get SNE in my portfolio. But this won't happen.

Microsoft is one of the oldest and newest tech companies at the same time. While it benefits from a strong core business model generating cash flow, management has proven its ability to develop other growth vectors. Its most recent success is called Azure, which is No. 2 in public cloud services. Azure has doubled its sales over the past 12 months and is prone for several years of growth. Finally, its strong relationship with corporate America opens the door for additional cross-selling opportunities as the cloud business expands.

In terms of dividend growth perspective, there is absolutely no comparison. Microsoft has dividend increases for 15 consecutive years (Dividend Achiever). Its yield used to be more attractive at near 3%. Even a double-digit dividend growth rate wasn't enough to compensate for the stock price surge since 2015. Assuming its usual dividend increase for the year's last quarter, dividend payment will have more than doubled since 2012, while both payouts and cash payout ratio remain under control.

As it is the case with many other companies, there are definitely better opportunities in North America if you are looking for tech stocks!