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Why Sony Stock Just Dropped 9%

By Rich Smith - Updated Apr 9, 2019 at 4:54PM

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Sales are weakening and may continue to do so -- but Sony's profits are just fine, thank you.

What happened

Shares of Japanese electronics, entertainment, and gaming giant Sony (SONY 0.43%) were down 9% as of 1:15 p.m. EST on Friday after the company reported fiscal Q3 2018 earnings results.

Sales for the fiscal quarter were 2.4 trillion yen ($21.3 billion), down 10% year over year and far below the $23.6 billion in sales that Wall Street had been expecting. That fact alone probably explains investors' strong negative reaction to the report.

Operating profits, however, came in at 377 billion yen ($3.3 billion), up 7%, while net profits were even stronger at 429 billion yen ($3.8 billion), a 45% increase over the year-ago number, helped by tax cuts and a favorable foreign exchange rate.

Glowing red arrow trending down

Red alert! Sony stock is going down! (But should it be?) Image source: Getty Images.

So what

Sales in Sony's flagship game and network services division rose 10%, while operating profit declined 14%. Music sales declined 4%, but profits there nearly quadrupled! Financial services, once one of Sony's largest divisions, saw sales cut by more than half, and profits slide 32%.

Now what

Sony also updated investors on its expectations through the end of fiscal year 2018.

Whereas in October, Sony had forecast sales of 8.7 trillion yen for the fiscal year, it's walked that number back, and now expects sales of only 8.5 trillion yen -- actually a bit below last year's total. Sony's standing pat on its operating profits forecast, however, and still believes it will earn 870 billion yen.

Check out all our earnings call transcripts.

Net income, expected to be only 705 billion yen three months ago, is now seen as coming in at a much stronger 835 billion yen. On balance, therefore, I have to say that today's sell-off looks like something of an overreaction. Even if sales are slowing, profits are coming in quite nicely, and look to be up as much as 70% over fiscal 2017 levels. With Sony stock still selling for less than 10 times trailing earnings, opportunistic investors might want to take advantage of this sell-off -- and buy.

 

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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