Shares of Japanese technology and entertainment giant Sony Group (SONY +0.10%) slid 3.2% through 10:30 a.m. ET Friday after multiple news outlets reported Sony is eyeing a purchase of (all or part) of Elden Ring developer Kadokawa.
Elden Ring is a popular role playing game developed by FromSoftware, a subsidiary of Kadokawa.
Kadokawa itself is an entertainment conglomerate a bit like Sony, but smaller. According to S&P Global Market Intelligence, Kadokawa publishes manga comics and video games, produces movies, and runs assorted other businesses in education and web services.
Sony eyes a buy
Reuters was first to highlight this story back in November, when it reported that Sony was in "talks" to acquire Kadokawa, which is publicly traded on the Tokyo Stock Exchange and had a market capitalization of $2.7 billion at the time.
Neither company would comment on the talks back then, but they seem to have progressed. On Wednesday, gaming news site IGN reported that Sony has "confirmed" its desire to buy Kadokawa (which now costs closer to $4 billion), and has delivered to Kadokawa a "statement of intent" to acquire the whole company (of which Sony already owns 2%).
In November, IGN observed that Sony once paid a similar amount, $3.7 billion, to buy video game powerhouse Bungie, in 2022, and that a purchase of all of Kadokawa might cost not much more -- $4.3 billion.
Is Sony stock a sell?
Elden Ring is a hit video game, having sold in excess of 25 million units, with a recent expansion pack selling 5 million units in three days. It's a logical target for Sony to want to own. It's presumably the price, therefore, that is spooking Sony investors today.
If that's the case, though, I don't think they need to worry. Elden Ring alone is estimated to have garnered in excess of $1.5 billion in revenue, and if Sony is only paying about a 2 times price-to-sales ratio -- while Sony's own stock costs about 1.5 times sales -- this doesn't seem overly expensive to me.
I see no reason here to sell Sony.
