As Sony (SONY 1.10%) prepares to launch the highly anticipated PlayStation 5 video game console this holiday season, the PlayStation 4 appears to be going out in style. The stock has nearly doubled over the last year on top of strong results from Sony's gaming business. For the fiscal first quarter, the company reported strong earnings results thanks to high engagement with the PS4 amid the COVID-19 pandemic.
Investors might be looking at Sony as a top gaming stock to consider in light of its recent performance and the prospects for continued growth with the launch of the PS5. But before taking the plunge, here's three things you need to know about Sony's most important business.
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1. Sony doesn't need to sell more consoles to grow
The game and network services segment was Sony's largest and most profitable division last quarter, contributing 31% of total sales and 55% of total operating profit. For fiscal 2019, gaming accounted for 24% of total sales and 28% of total operating profit.
If we go back 15 years to the fiscal year ending in March 2005, Sony's gaming segment generated $6.8 billion in sales, with $404 million in operating income. This was the peak of the PlayStation 2 generation, a console that sold 157.7 million units -- Sony's all-time best-selling game system.
The gaming business generated $18.1 billion in sales in fiscal 2019, or more than double what it did 15 years ago. Operating profit has vastly improved to $2.2 billion over that time. This growth is despite the PlayStation 3 and the PlayStation 4 selling fewer units than the PlayStation 2. For perspective, the PlayStation 4 had sold 112.1 million units through June 2020.
The installed base of PlayStation owners hasn't grown since the original PlayStation console was introduced in the 1990s. Sony has made up for that through sales of exclusive titles developed in-house, like the recent best-sellers Ghost of Tsushima and The Last of Us: Part 2, as well as digital sales of games, content, and other services, all of which have accounted for a growing share of gaming revenue on the PlayStation platform.
2. Sony is pushing the services side of PlayStation
The new console generation launching with the PlayStation 5 is about more than just delivering better graphics. Sony's goal is to continue growing subscriptions with PlayStation Plus and the PlayStation Now cloud gaming service.
As of June 2020, Sony had 113 million monthly active users on the PlayStation network. Out of those, 45 million were subscribing to PlayStation Plus, a service that is required to play online in multiplayer game modes, and also provides players free games every month and special deals in return for a monthly subscription fee.
Cloud gaming has been the new buzz word in the video game industry over the last few years. Alphabet launched Google Stadia and Microsoft has Xbox Game Pass, which allows Xbox users to access games on mobile devices. But Sony beat its competitors to the punch when it launched PlayStation Now in 2014 as a rental service before transitioning it to a subscription service in 2016.
PlayStation Now has grown from over 700,000 users in March 2019 to 2.2 million as of April 2020. Sony's remote play feature, which allows PlayStation 4 owners to access content on iOS, PC/Mac, and Android devices, grew monthly active users by 2.5 times during calendar 2019.
The growth of these services is one reason why profits in the gaming segment have improved over the last 15 years, despite no growth in hardware unit sales.
3. Streaming is the next step of Sony's gaming strategy
Sony originally launched its PlayStation network business strategy on the PlayStation 3 in 2006. The investment in network services didn't fully take hold until the launch of the PlayStation 4 in 2013. By then, Sony had introduced the PlayStation Plus service in 2010 and was able to capitalize on the shift in the industry to digital distribution of content.
It's the extent that Sony continues to grow digital services that will determine whether the gaming business will keeping increasing sales and profits through the PlayStation 5 cycle and fuel the stock's performance.
The momentum Sony has experienced in recent years with the growing adoption of network services, such as PS Plus and PS Now, should continue with the PS5, given the company's investments to expand the new console's streaming capabilities, such as cloud gaming.
The stock sports a price-to-earnings ratio of 15.9. One reason for the modest valuation is that Sony is involved in several business segments, including image sensors and consumer electronics, but the company is increasingly focused on smoothing annual earnings volatility by growing digital streaming revenue in the gaming and music businesses. Further progress on these fronts could be enough to keep this tech stock climbing higher over the next five years.
