Microsoft (MSFT -1.70%) and Sony (SONY -2.37%) operate very different business models, but they have overlapping interests in the video game market. That's why Microsoft's recent decision to buy Activision Blizzard (ATVI -0.05%) for $68.7 billion caused Sony's stock price to retreat from its highest levels in over two decades.
However, I believe Microsoft and Sony are still both safe long-term investments as rising interest rates crush more speculative growth stocks. So should you consider buying one stock over the other right now?
The differences between Microsoft and Sony
Microsoft splits its business into three core divisions that each generate about a third of its revenue. Its Productivity and Business Processes division hosts Office, Dynamics, LinkedIn, and other enterprise software.
Its Intelligent Cloud segment handles its server products, services, and Azure cloud computing platform. Its More Personal Computing segment houses its Windows, Xbox, search, and advertising businesses.
Microsoft's total cloud revenue, which includes all of its cloud-oriented services across all three segments, accounted for 43% of its top line in its latest quarter. Its fastest-growing cloud businesses are Azure, which ranks second in the cloud platform market after Amazon Web Services (AWS), and Dynamics, which competes against Salesforce and other players in the customer relationship management (CRM) market.
Sony operates six main business segments: Game & Network Services (G&NS, 27% of its revenue in its latest quarter), Electronics Products & Solutions (EP&S, 23%), Sony Financial (16%), Imaging & Sensing Solutions (I&SS, 11%), Sony Music (10%), and Sony Pictures (15%).
The G&NS unit houses its PlayStation console, games, and services. The EP&S unit sells TVs, audio devices, smartphones, cameras, and other consumer electronics. Sony Financial generates most of its revenue from life insurance policies and investments, while the I&SS unit primarily produces image sensors for smartphones and digital cameras.
Sony Music houses its recorded and streaming music businesses, as well as its anime and mobile gaming divisions. Sony Pictures produces movies as well as TV shows, which are licensed to other media companies.
Which company is growing faster?
Microsoft's expansion of its cloud services, especially Azure, Dynamics, and Office 365, offset its slower sales of on-premise software in recent years. Between fiscal 2016 and fiscal 2021 (which ended last June), Microsoft's revenue grew at a compound annual growth rate (CAGR) of 14.5%, while its earnings per share (EPS) increased at a CAGR of 30.8%.
That robust growth enabled Microsoft to generate plenty of cash to expand its ecosystem with dozens of acquisitions -- including LinkedIn in 2016, GitHub in 2018, ZeniMax in 2021, and Activision Blizzard this year.
The stickiness of Microsoft's ecosystem -- which spans across PCs, consoles, mobile apps, servers, and cloud services -- enables it to continuously lock in both enterprise customers and mainstream consumers. Analysts expect Microsoft's revenue and earnings to rise 18% and 16%, respectively, this year, as those growth engines continue to fire on all cylinders.
Sony's growth was a lot less impressive. Between fiscal 2015 and fiscal 2020 (which ended in March 2021), its revenue grew at a CAGR of just 1.8%. It posted a net loss in 2015, but it returned to profitability the following year, and its EPS increased at a CAGR of 68% between 2016 and 2020.
Sony's gaming, financial, and music businesses stayed strong throughout the pandemic in 2020. But its pictures, chipmaking, and consumer electronics divisions all struggled with pandemic-related headwinds and disruptions.
That balance shifted in the first nine months of fiscal 2021. Its pictures and consumer electronics segments recovered, but its gaming business slowed down against tough comps, the financial segment sold fewer life insurance policies, and its image sensor shipments remained sluggish.
The concerns regarding Microsoft's purchase of Activision are likely overblown since Microsoft doesn't plan to lock in any of its top franchises as platform exclusives anytime soon. Sony also plans to acquire more publishers, starting with Bungie for $3.6 billion, to strengthen its own stable of gaming franchises.
Sony faces more significant supply chain headwinds than Microsoft, but analysts still expect its revenue to grow 11% this year. Analysts expect Sony's earnings per share to decline 33% on tax-related charges, but the company still expects its operating profit to rise 26% for the full year.
The valuations and verdict
Microsoft has better growth metrics than Sony, but its high forward price-to-earnings ratio of 33 reflects those strengths. By comparison, Alphabet and Meta Platforms trade at 23 times and 20 times forward earnings, respectively.
Sony trades at just 17 times forward earnings. That discount likely reflects the market's trepidation regarding Microsoft's Activision deal, the supply chain headwinds for its chip business, and its slower life insurance sales.
Microsoft's stock is more expensive, but I think it's better to pay a premium for a high-quality business than to settle with a decent one in this wobbly market. Both stocks are still worth buying today, but I believe Microsoft will still outperform Sony -- as it did over the past five years -- once again in 2022.