Sony's (SNE 1.70%) stock recently dipped after Japan revealed that its GDP fell 6.3% in the final quarter of 2019, marking its steepest drop in five years. The decline was attributed to a sales tax hike, a destructive typhoon, and sluggish trade.
Japan's GDP is expected to contract again in the first quarter, as the coronavirus outbreak disrupts its tourism industry and impacts companies that rely on Chinese supply chains and consumers. Those two consecutive quarters of declines would signal a recession -- and could spell trouble for top Japanese companies like Sony.
Shibuya Crossing, Tokyo. Image source: Getty Images.
However, Sony's stock rebounded from that brief swoon as investors realized that the company was well diversified across multiple sectors and regions. Let's discuss how Japan's economic slowdown could impact Sony, and whether or not the stock still has room to run after rallying nearly 50% over the past 12 months.
How much revenue does Sony generate from Japan?
Sony generated 30% of its revenue from Japan last quarter, making it the company's single largest market. Here's how its domestic sales fared over the past year.
|
Japan |
Q3 2018 |
Q4 2018 |
Q1 2019 |
Q2 2019 |
Q3 2019 |
|---|---|---|---|---|---|
|
Revenue (billions yen) |
516.6 |
774.4 |
627.5 |
669.3 |
729.2 |
|
YOY growth |
(33%) |
22% |
(1%) |
0% |
41% |
|
Percentage of revenue |
22% |
36% |
33% |
32% |
30% |
Data source: Sony quarterly reports. YOY = year over year.
Sony's Japanese revenue rose 41% annually last quarter, but that was mainly due to an easy comparison to the third quarter of 2018, when it sold its 25% stake in the cable network Star Channel Japan. Sony also sold some shares of its real estate subsidiary SRE Holdings last quarter, and those proceeds further amplified its growth. Excluding those one-time events, Sony's growth in Japan remains fairly tepid.
What do we know about Sony's Japanese businesses?
Sony doesn't break down its Japanese revenue by end market. However, we know it's a major market for its PlayStation gaming consoles, consumer electronics, music, mobile games, and financial services.
Sony has shipped 107.1 million PlayStation 4 consoles since late 2013, according to VGChartz. Of that total, 8.8 million, or 8%, were sold in Japan. Sony sells its PlayStation consoles at thin margins or losses to generate higher-margin software sales, but most of the platform's top-selling games -- including Grand Theft Auto V, Call of Duty: Black Ops 3, and Red Dead Redemption 2 -- sold fewer than a million copies in Japan. Therefore, international markets generally matter much more to Sony's gaming business than its domestic gamers.
The PS4 console and PlayStation VR headset. Image source: Sony.
Sony's consumer electronics unit has been struggling with sluggish demand for its TVs and smartphones, due to competition from rivals like Apple and Samsung. Sony still trails behind Samsung and LG Electronics in the country's premium TV market, according to IHS Markit, while Apple controls nearly two-thirds of its smartphone market, according to StatCounter. Japan's economic downturn could make it even tougher for that business to recover.
Sony's music business, which also publishes mobile games via its Aniplex subsidiary, remains a mixed bag in Japan. Its music catalog is strong, with top-selling artists like UVERworld and Ikimono-gakari, and its streaming revenue is robust. However, that growth is being partly offset by waning interest in Fate/Grand Order, Aniplex's popular mobile game which generates a large portion of its revenue in Japan. On the bright side, music and mobile games are generally recession-resistant businesses -- so popular albums and new games could breathe fresh life into the music unit.
However, Sony's financial unit, which generates most of its revenue from Japan, could struggle if a full-blown recession hits. Sales of its life insurance products could slide as consumers rein in their spending, while the value of Sony Bank's investment portfolio could tumble. This business, which Sony expects to generate 17% of its revenue and 16% of its operating profits this year, could bear the brunt of a Japanese recession.
But will the headwinds overpower the tailwinds?
Japan's economic slowdown will impact Sony, but I believe two main tailwinds -- rising demand for its image sensors and the upcoming launch of the PS5 -- will counter those headwinds. Moreover, the upcoming Olympic Games in Tokyo during the summer could revive Japan's economy if the coronavirus crisis ends.
Investors should keep an eye on Sony's consumer electronics and financial services segments as Japan's economic growth sputters out, but they shouldn't panic and sell their shares of a well-run company which trades at just 15 times next year's earnings.
