After a dismal performance in 2022, the capital markets came roaring back last year. These gains have poured over into 2024, with the S&P 500 index returning an impressive 45% since last January.
Given the meteoric rise in equity prices, it's not entirely surprising to learn that stock splits have seen an uptick. Although stock splits do not inherently change the valuation of a company, the lower share price generally provides a way for a broader base of investors to buy the stock.
Some notable companies that have pursued stock splits this year include Nvidia, Broadcom, Walmart, and Chipotle Mexican Grill.
Another stock-split candidate has joined the party, and I'm keeping a close eye on this one right now. Sony Group (SONY +1.92%) announced plans for a 5-for-1 split set to occur on Oct. 1.
Let's dig into Sony's business and explore why now could be a good opportunity to scoop up some shares.
NYSE: SONY
Key Data Points
Sony is in the midst of a turnaround
Sony is a Japanese conglomerate that operates in areas such as consumer electronics, entertainment, gaming, and more. A lesser-known segment of Sony's business is its presence in the financial services industry.
However, Sony's management has deemed the financial services unit as a non-core part of the business. For this reason, the company is pursuing a spinoff of its financial services business -- a transaction that is forecasted to be completed in 2025.
On the surface, divesting non-core assets may be seen as a risk due to the complex nature and time consumption of these transactions. I'd argue that Sony is simply in the middle of a turnaround, and has identified areas that are no longer pertinent to the long-term growth narrative.
Image source: Getty Images.
Why I have my eyes on Sony stock
One of the biggest tailwinds fueling the prolonged market gains right now is artificial intelligence (AI). While talking points in AI have primarily been tied to megacap tech companies, savvy investors know that there are myriad opportunities in the market.
Candidly, I see Sony as an under-the-radar AI opportunity worth keeping an eye on.
Some of Sony's biggest businesses include its gaming and network services, imaging and sensing solutions, and entertainment, technology, and services units. Each of these operations has massive potential to benefit from the AI revolution.
Namely, demand for semiconductor chips has been abnormally high over the last couple of years. Considering Sony manufactures devices such as cameras, gaming consoles, and televisions, I think the company is going to be a subtle beneficiary of booming chip demand as the company rolls out new products and services.
Despite Sony's potential to generate new growth from AI, investors don't appear to be pricing it into the stock yet. This presents an interesting opportunity to scoop up shares of Sony while its AI potential remains discounted.
Is Sony stock a good buy before its upcoming split?
Right now, Sony stock trades at a price-to-earnings (P/E) multiple of just 16.4. This valuation is historically low for Sony and pales in comparison to the S&P 500, which boasts a P/E of 27.5.
SONY PE Ratio data by YCharts
Generally I'd caution investors about buying a stock around the time of a split because it can come with some outsize risk. Oftentimes, momentum traders will enter a stock either shortly before or after a split occurs. This activity can lead to abnormal volatility and leave unsuspecting investors holding the bag after traders suddenly dump the stock for a quick profit.
Of course, long-term investors don't need to worry so much about the exact timing of when they buy a stock. If your preference is to wait and see how the stock moves after the split while also monitoring the company's financial progress, that's ok.
But given Sony's split is still a few months away, I suspect there won't be any heightened volatility for a while. Considering the company's dirt cheap valuation, ongoing strategies to build a leaner organization, and underappreciated potential to benefit from AI tailwinds, I think Sony stock is a no-brainer buy right now.
