Sony (SONY 2.60%) has had a good year so far, despite supply shortages negatively impacting certain business segments, most notably consumer electronics. Total revenue should increase by 2% in fiscal 2021 (which ends March 31, 2022) based on current analyst estimates.
Looking ahead to next year, supply issues are expected to linger in the semiconductor industry, but Sony's primary growth driver is gaming, which generates stable sales and profits from the PlayStation Plus (PS Plus) and PlayStation Now (PS Now) subscription services. These digital revenue streams are not susceptible to hardware shortages.
Image source: Getty Images.
Along with driving the most growth, gaming is Sony's largest business. Based on forward guidance, the segment is expected to comprise 29% of total revenue and 31% of operating profit in fiscal 2021. While the supply of consoles is well short of demand right now due to chip shortages, there are good reasons to believe the gaming business could perform much better than investors expect and push the stock price higher in the new year.
Sony is targeting subscriber growth for its PlayStation business
A troubling percentage of gamers looking to get their hands on a PlayStation 5 (PS5) or Xbox One X have been out of luck since the new consoles launched a year ago. Still, the latest data from VGChartz shows that Sony has sold 15.9 million units of PS5, while Microsoft (MSFT 1.40%) has sold 10.25 million units of Xbox One X/S to date.
During its fiscal second-quarter earnings call, Sony's management reiterated its goal to exceed the second-year sales of the previous console generation. Through March, the PS5 had outsold its predecessor, with initial unit sales reaching 7.8 million, slightly ahead of PS4's 7.6 million within the same time frame eight years ago.
The PS5 could be on pace to be Sony's biggest console (by sales) in history. One reason is that the growth of PS Plus subscription service means there will be more incentive for PS4 owners to stay within the PlayStation ecosystem when they eventually upgrade their gaming console.
PS Plus provides exclusive discounts on games and free game downloads and is required if users want to play online in titles that support multiplayer. Since fiscal 2013, PS Plus members have grown from 5.8 million to 47.2 million through the most recent quarter.
More telling is that PlayStation's monthly active users reached a peak of 114 million during fiscal 2020, largely due to the stay-at-home environment. Some of those users have left the base over the past year, but Sony still has an army of loyal PlayStation users that is starting to stabilize at 104 million.
This is a large installed base of engaged users that is spending more money on game software and network services (PS Plus, PS Now, etc.), which generate higher margins than hardware sales. Here's a breakdown.
| Sales Category | Percent of Gaming Segment for Fiscal Q2 2021 |
|---|---|
| Hardware | 24.9% |
| Game software | 53.1% |
| Network services | 15.6% |
| Other (PlayStation VR and other peripherals) | 6.4% |
| Total segment sales | 100% |
Data source: Sony.
However, Sony is not without competition. Microsoft's Xbox Game Pass has been growing faster than Sony's Netflix-style gaming service, PS Now. Xbox Game Pass allows subscribers to play Xbox titles on mobile devices, as well as PC and console platforms. Earlier this year, Microsoft reported it had 18 million Game Pass subscribers, which is far above the few million for Sony's PS Now.
However, Bloomberg recently reported that Sony is planning to launch a new subscription service next year that could present much stiffer competition for Xbox Game Pass. The new service -- code-named "Spartacus" -- will merge PS Plus and PS Now into one service and allow subscribers to play a catalog of new and older titles like Xbox Game Pass. The new service will be accessible to both PS4 and PS5 owners.
Strong catalysts for the gaming business
The strong start to the new console generation, along with Sony's plans to expand its gaming subscription services, could be explosive for its digital revenue growth within the gaming segment, which could lead to better-than-expected earnings next year.
Moreover, Advanced Micro Devices (AMD 7.49%), which supplies the custom processors inside the new consoles, has said that the supply situation for chips should improve toward the end of 2022. This could take the lid off the high demand for the PS5 and drive higher hardware revenue, allowing the economics of manufacturing consoles, which are sold around break-even prices at launch, to reach profitability much faster.
There is momentum brewing in Sony's largest operating business. The good news is that the market doesn't seem to be discounting very high growth over the next few years. The price-to-earnings ratio currently sits at just under 20 based on fiscal 2021 earnings estimates, which looks attractive considering the near-term catalysts in the PlayStation business.
