3 Huge Risks Sony Corporation Investors Need to Consider

Will Sony's comeback effort be successful amid increasing competition with Samsung, Apple, and Google?

Keith Noonan
Keith Noonan
Jul 15, 2014 at 11:30AM
Technology and Telecom

Source: Sony.com

Sony (NYSE:SNE) has had a challenging year. Despite the World Cup bolstering television sales and the launch of hit products like the PlayStation 4, its share price trades approximately 23% lower than it did twelve months ago. The company's fiscal report for the year ended March 31 brought in a $1.1 billion operating loss, prompting questions as to whether President Kazuo Hirai could successfully orchestrate his comeback strategy. In an effort to trim expenses, the company has begun a restructuring process and will reduce its workforce by more than 5,000 people this year.

What are the big risks that investors should consider as Sony makes its comeback efforts? Is the company a worthwhile investment even as it increasingly moves into competition with Samsung (NASDAQOTH:SSNLF), Apple (NASDAQ:AAPL), and Google (NASDAQ:GOOG) (NASDAQ:GOOGL)?

Sony's hardware reshuffling is costly and risky
For the current fiscal year, Sony anticipates an operating loss of $489 million. The company expects approximately $800 million in losses to come from its PC division, with much of this projected expense coming from completing the sale of the unit. Last year saw the company incur approximately $566 million in losses related to its exit from the PC market, and similar costs will be present this year. In addition to selling its computer business, Sony also recently spun off its television business.

While Sony's TV business is expected to return to profitability this year, it looks to be a source of ongoing challenges for the company. Sony has incurred approximately $8 billion in losses over a decade thanks to its TV operations, and it faces strong competition from Samsung, LG, and Chinese manufacturers. Disparities in the labor market have already forced the Japanese company to outsource production in order to retain television market share amid an influx of inexpensive competitors. If Sony's increasingly independent TV wing can't find a way to compete, exiting the business could be very costly.

Sony may be overly dependent on hardware
For now, Sony can celebrate the incredibly successful launch of its PlayStation 4 gaming console. The company's video games division generated $78 million in losses in the last fiscal year, but much of that can be attributed to costs associated with launching a new platform. The division should return to profitability this year.

While PS4 has undeniably had one of the most successful launches in industry history, there is no guarantee that PlayStation hardware will remain dominant or viable in the future. With smartphones, tablets, and smart TVs incorporating an ever-increasing array of features, there is mounting pressure on the dedicated gaming market.

The technological trend toward device convergence suggests that Sony may be stuck with its television business. If smart TVs render dedicated gaming machines, video players, and optical media irrelevant, Sony will need to rapidly restructure to a service-based model or be well-positioned in the hardware space to avoid collapse.

The competition looks strong
President Hirai has put forth imaging, gaming, and mobile as the pillars for growth. While Sony's camera sensor and digital imaging component is performing well, the other two pillars look somewhat shaky amid strong competition. The Japanese company must contend with Samsung, Google, and Apple in the smartphone and tablet markets, placing Sony in a difficult spot. It currently lacks the brand strength and resources necessary to thrive in the high-end market, and a deluge of low-cost alternatives creates obstacles to future success.

Threatening one of Sony's greatest assets, Apple has shown a growing interest in the gaming space. The company's Apple TV platform looks to be more increasingly tailored toward gaming support, and improved controller and input functionality are ongoing projects. A report from the company's June WWDC show stated that the company's Game Center platform has over 130 million active monthly users.  

There are also other notable set-top box competitors that threaten Sony's gaming business. April saw the release of Amazon's Fire TV, and Google is in the midst of a big gaming push with an official game controller for the Android platform having been spotted at the recent I/O conference and in the Android L software development kit.

Foolish takeaway
There are a lot of troubling aspects about Sony's business at present. The company is expected to report significant losses on year. With a market cap of approximately $17.4 billion and a junk credit status, Sony isn't in the best shape to compete against the current titans of tech, and its valuation at 0.23 times trailing twelve month sales reflects this reality. 

It's difficult to envision a scenario in which the company manages to reclaim significant TV market share from Samsung, LG, and other competitors, and the sectors it envisions as growth drivers are heavily contested. The Japanese hardware and software maker is also being affected by currency fluctuations, and a heavy reliance on its financial services division means that the company could be greatly affected by downturns in the market.

It's not unreasonable to think that Sony will outperform the market this year, but more long-term positions require belief in the company's comeback and restructuring initiatives. For the time being, there's not a whole lot of evidence to suggest that they will be successful.