Sony (SONY -0.40%) recently posted its third-quarter earnings report. The Japanese conglomerate's revenue grew 3% annually to 2.46 trillion yen ($22.6 billion), while its adjusted net income rose 37% to 58.3 billion yen ($530 million).

Its GAAP net income -- which factors in the consolidation of EMI Music, the public listing of SRE Holdings, the transfer of its shares in NSF Engagement, pension charges, and various tax adjustments -- fell 46% to 229.5 billion yen ($2.1 billion).

Sony's numbers topped estimates on both the top and bottom lines, but does the stock deserve to go higher after rallying more than 50% over the past 12 months? Let's dig deeper into the company's strengths and weaknesses to decide.

A young woman wears Sony headphones.

Image source: Sony.

Sony's two core growth engines remain strong

Sony's two strongest businesses over the past year were its image and sensing solutions (I&SS) unit and Sony Music, which also includes its anime and mobile games unit Aniplex.

Its I&SS revenue rose 29% annually and accounted for 12% of Sony's top line. Its operating profit jumped 62% and accounted for 25% of its operating income.

A close-up of a camera lens.

Image source: Getty Images.

The I&SS unit produces image sensors for about half the world's smartphone makers. The smartphone market remains sluggish, but demand for Sony's image sensors is surging as OEMs install higher-quality cameras or multi-camera setups in their phones. The unit's growth enables Sony to profit from the growth of the smartphone market even as its own Xperia phones control less than 1% of the market.

Sony raised its full-year guidance for the I&SS unit back in October and did so again in its latest report. It boosted the unit's full-year revenue guidance from 18% to 24% growth and lifted its operating profit forecast from 39% to 60% growth. Those rosy estimates indicate that the I&SS unit will remain Sony's core growth engine for the foreseeable future.

Sony Music's revenue rose 4% and accounted for 9% of its top line. The unit benefited from higher streaming revenue, but lower revenue from Aniplex's Fate/Grand Order -- the highest-grossing mobile game of 2019 -- offset some of those gains.

The unit's operating profit fell 75% and only accounted for 12% of Sony's operating income, but the decline was largely expected, and attributed to its consolidation of EMI. It left the unit's full-year forecast unchanged, with a 5% growth in revenue and a 40% decline in operating profits.

Pictures and consumer electronics remain sluggish

Sony Pictures, which produces the company's films and TV shows, struggled as it faced tough comparisons to last year's release of Venom. It also generated lower TV and home entertainment licensing revenue.

The unit's revenue, which accounted for 10% of Sony's top line, fell 15%. Its operating profit tumbled 53% but accounted for less than 2% of Sony's operating income. Sony expects the unit's revenue and operating income to rise 4% and 28%, respectively, for the year, unchanged from its prior forecast.

The electronic products and solutions (EP&S) unit also remained weak due to poor sales of TVs and smartphones. Sony faces intense competition in both markets from Samsung and cheaper Chinese competitors.

The unit's revenue fell 9% and accounted for 26% of its top line. However, its operating profit -- which accounted for 27% of Sony's operating income -- rose 21% as it aggressively cut costs at its struggling mobile division. Sony lowered the unit's full-year revenue forecast from a 9% decline to an 11% decline, but it maintained its operating profit forecast for 45% growth -- which suggests that it will continue to cut costs to hit that target.

The gaming unit approaches a cyclical trough

Expectations were low for Sony's game and network services (G&NS) unit since many gamers are postponing their purchases ahead of the PS5's arrival at the end of the year. That's why it wasn't surprising when the unit's revenue, which accounted for 26% of Sony's top line, fell 20%. Its operating profit, which accounted for 18% of Sony's operating income, tumbled 27%.

Sony attributed those declines to lower hardware and software sales. It expects the unit's revenue and operating income to decline 16% and 24%, respectively, compared to its prior expectations for 13% and 23% declines in revenue and operating profits, respectively.

On the bright side, the G&NS unit could be poised for a strong recovery when the PS5 launches during the holidays. That launch, along with the strength of Sony's I&SS unit, could offset its other weaknesses in fiscal 2020 and beyond.

The key takeaways

Sony's massive business can be tough to read, but its strengths still outweigh its weaknesses. The growth of its I&SS business should offset the softer growth of its electronics and pictures businesses, and help the company tread water until the PS5 launch restarts the gaming unit as its core growth engine.

Analysts expect Sony's revenue and earnings to rise 4% and 7%, respectively, next year, as its growth evens out again. Those are solid growth rates for a stock that trades at 16 times forward earnings, and indicate that the stock could still have plenty of room to run this year.