Demand for Sony's (SONY 0.89%) PlayStation 5 and Microsoft's (MSFT 0.88%) Xbox Series X has been extremely high following their launches earlier this month. Both game systems remain sold out everywhere, with restocked inventory selling out within minutes at major retailers online.
With Sony's stock price currently sitting at a new high, investors might be wondering if it's a buy at these levels. Here's what you need to know.
On Nov. 25, Sony's official PlayStation account issued a statement on Twitter, stating that the demand for PlayStation 5 (PS5) has been "unprecedented."
What's more, the difficulty of keeping these consoles in stock is not attributed to a supply shortage due to the pandemic, but instead to a heightened level of interest in gaming, as more people seek out entertainment alternatives at home. In the first half of fiscal 2020, Sony reported strong growth in the gaming segment that more than offset weak results in music, pictures, electronics, and imaging solutions.
Sony's Executive Vice President Jim Ryan, who is head of PlayStation, revealed in an interview with the BBC that Sony was making more PS5 units for this launch than during the previous launch of PS4 seven years ago. Obviously, that is still not enough to meet demand.
Even Sony's gaming rival is experiencing the same problem. In a recent interview with The Verge, Microsoft's head of Xbox Phil Spencer suggested that consumers who want an Xbox Series X/S should try to buy one when they see it in stock, because the current demand/supply situation may remain through the spring.
What gaming means to Sony
High demand for these new consoles is great news for Sony, but investors should be aware that Sony is a massive business that generates $76 billion in annual revenue. Most of its business segments haven't generated much growth, with the pictures segment experiencing downward pressure on revenue during the pandemic with theaters closed. It's primarily the growth in the gaming business that has sent the share price up 38% year to date.
From fiscal 2012 through fiscal 2019 (which ended in March), Sony's gaming revenue more than doubled and is expected to make up 30% of the company's total revenue in fiscal 2020. That's up from 10% in fiscal 2012. Moreover, the growth in digital sales, including subscriptions to PlayStation Plus, is driving higher margins for the gaming segment, and that improvement is responsible for nearly half of Sony's total operating income growth over the last seven years.
|Metric||Fiscal 2012||Fiscal 2019|
|Gaming segment operating income||$0.21 billion||$2.19 billion|
|Sony's total operating income||$2.73 billion||$7.78 billion|
Sony expects the gaming business to contribute 42% to the company's total operating profit in fiscal 2020, which is up from 28% in fiscal 2019.
Sony has high expectations for PS5
With gaming becoming a larger slice of Sony's total revenue, investors are increasingly watching the performance of all things PlayStation. The PS4's focus on digital distribution of games and content was enormously beneficial to the company's bottom line, but the new console generation should bring more benefits, with a deeper push into subscription services.
Sony expects to sell 7.6 million units of PS5 in fiscal 2020. That would exceed the launch year total for PS4. This is huge given that the PS4 went on to sell a cumulative 112 million units through June 30, 2020. While that is far short of the PS2's 157 million units sold in the early 2000s, unit sales are not as important as player engagement in driving growth.
This is where subscription services should pay off. PlayStation ended the fiscal second quarter with 107 million monthly active users, out of which 45.9 million were subscribed to PlayStation Plus, and those subscriber totals have been steadily increasing in recent quarters.
During the fiscal second-quarter conference call in late October, CFO Hiroki Totoki said: "Our strategy is to grow sales and profit through increased user engagement driven by great gaming experiences on the PS5, and we aim to accelerate the growth of recurring sales and profit by expanding the reach."
To accomplish that objective, Sony wants to attract more subscribers to its PlayStation Now cloud gaming service that had 2.2 million signed up as of June. That trails the 15 million signed up on Xbox Game Pass. Sony's Jim Ryan hinted in an interview with TRASS that something new is coming down the pike with respect to PlayStation's cloud gaming offering, but he didn't provide any other details.
On top of growing subscriptions, Sony expects to have the largest slate of exclusive games available with the launch of PS5 than any other launch in its history, which should help drive higher hardware sales and attract more subscribers to PS Plus and PS Now.
The stock looks cheap, but...
Strong sales of PlayStation 5 are a growth catalyst for Sony stock since gaming represents a sizable and growing portion of the company's total operating profit.
Still, gaming represents less than half of Sony's total business, so investors will have to monitor how other segments perform. While other operating segments, such as pictures and electronics, haven't produced much growth over the years, management looks at its various segments as a portfolio of businesses that it uses to drive returns for shareholders.
Because most of Sony's businesses lack the growth prospects of digital media, such as gaming and music, the stock trades at a relatively low price-to-earnings (P/E) ratio of 13.4.
For the stock to rise meaningfully from these levels over the next few years, Sony will need to maintain stable performance from its various segments, at a minimum.
On top of that, strong sales of PS5 are crucial to ensure there is a growing market for its subscription services and other digital content offerings since this is what drives profit growth.
Beyond hardware sales, investors should watch for any announcements regarding Sony's plans for the PlayStation Now cloud gaming service. PS Now allows gamers to play PlayStation games on PC without owning a console, which could become a big driver of growth for not just Sony's gaming business, but the entire video game industry over the long term.
Investors will want to check in with Sony's fiscal third-quarter earnings report in a few months to see exactly how many units of PS5 it sold. The new console generation is clearly off to a hot start, which bodes well for the stock's momentum. But over time, the real test of Sony's mettle will be growth in monthly active users, which serves as the immediate market for PlayStation's various digital content offerings.