Sony (SONY) reported a second consecutive beat and raise quarter. Even after the previous quarterly report, we still thought that guidance was conservative, so we are pleased but not surprised with another step forward confirming our investment thesis.  We could almost republish our last quarterly update and just add today’s date.  Three months ago, we wrote, “Sony (SONY) reported better than expected 1Q22 earnings and raised full-year guidance.  We had thought that guidance was conservative, both short-term and long-term, so the news was not surprising.  It is welcome news in support of the long-term investment thesis that SONY’s individual businesses are deeply undervalued compared to peers with a management team that has executed well strategically, operationally, and financially to remake the company over the past five years.” 

Stock Reaction:  One thing that has changed is SONY shares are beginning to reflect the good results.  The stock is trading up over 4% to an all-time high in U.S. trading following the report.  SONY recently received a buy rating from a U.S-based analyst that covers media, entertainment, and video game stocks.  Most Japanese analysts that cover SONY are focused on electronics and technology based on the company’s tradition.  We believe this has held back the stock.  Hopefully, another beat and raise quarter will improve sentiment in Japan and encourage more U.S. analysts to follow the shares.

Earnings Analysis:  While earnings were good relative to expectations in most segments, the most encouraging aspect of the 2Q21 report was the broad-based increase in guidance.  Revenues were increased in Music, Pictures, and Financial Services and lowered only in Electronics Products.  Operating income was boosted in Music, Pictures, Electronics Products, and Imaging and maintained in Games and Financial Services.  We are especially encouraged by the outlook for Music and Pictures and eventually a resumption of upside in Games after that business shifts back from money-losing sales of PS5 game machines to high-margin video games and network services.

Target Price:  We are raising our target on SONY to $155 based mostly on rolling over to 2022 estimates.  Our new estimates are slightly higher reflecting the second consecutive beat and raise quarter.  However, we did slightly lower our EBITDA multiple to reflect the multiple compression in video game publishing stocks such as Activision Blizzard and Electronic Arts.  This is a conservative approach as the valuation of music labels has expanded materially since the highly successful IPO of industry leader Universal Music Group in September.  SONY is #2 in music and is enjoying the same strong financial performance as UMG.  The bottom line is SONY shares still look undervalued at 11X EBITDA when peers in music, video games, entertainment, and imaging sensors (semiconductors) trade at higher multiples.  Those businesses account for over 80% of SONY’s operating income.  As analysts and investors in the U.S. and Japan gain appreciation for SONY’s transformation and consistent superior execution, we believe valuation will expand with a further boost for the shares coming from additional upside on still conservative guidance.

SONY is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.