Sonyit is (NYSE: SNE) The stock recently fell after Japan revealed that its GDP fell 6.3% in the last quarter of 2019, marking its largest drop in five years. The decrease was attributed to an increase in sales tax, a destructive typhoon and sluggish trade.
Japan’s GDP is expected to contract again in the first quarter as the coronavirus epidemic disrupts its tourism industry and affects businesses that depend on Chinese supply chains and consumers. These two consecutive quarters of declines would mean a recession – and could cause trouble for big Japanese companies like Sony.
However, Sony’s shares rebounded from this brief faint when investors realized that the company was well diversified across several sectors and regions. Let’s see how the Japanese economic slowdown could have an impact on Sony, and if the title still has room after increasing by almost 50% in the past 12 months.
How much revenue does Sony generate in Japan?
Sony generated 30% of its sales in Japan in the last quarter, making it the company’s largest market. Here’s how its domestic sales have evolved over the past year.
Income (billion yen)
Percentage of revenues
Sony’s Japanese revenue grew 41% a year in the last quarter, but that’s mainly due to an easy comparison to the third quarter of 2018, when it sold its 25% stake in the Star Channel cable network Japan. Sony also sold certain shares of its real estate subsidiary SRE Holdings in the last quarter, and this product further boosted its growth. Excluding these one-off events, Sony’s growth in Japan remains rather lukewarm.
What do we know about Japanese companies from Sony?
Sony does not break down its Japanese revenues by end market. However, we do know that this is a major market for its PlayStation game consoles, consumer electronics, music, mobile games and financial services.
Sony has delivered 107.1 million PlayStation 4 consoles since late 2013, according to VGChartz. Of this total, 8.8 million, or 8%, were sold in Japan. Sony sells its PlayStation consoles at low margins or losses to drive higher margin software sales, but most of the best-selling games on the platform – including Grand Theft Auto V, Call of Duty: Black Ops 3, and Red Dead Redemption 2 – sold less than a million copies in Japan. As a result, international markets generally count much more for Sony’s gaming activities than for its domestic players.
Sony’s consumer electronics unit has faced sluggish demand for its televisions and smartphones due to competition from rivals like Apple and Samsung. According to IHS Markit, Sony is still following Samsung and LG Electronics in the country’s premium TV market, while Apple controls nearly two-thirds of its smartphone market, according to StatCounter. The economic slowdown in Japan could make recovery from this activity even more difficult.
The music business of Sony, which also publishes mobile games through its subsidiary Aniplex, remains a mixed bag in Japan. Its music catalog is solid, with top-selling artists like UVERworld and Ikimono-gakari, and its streaming revenues are robust. However, this growth is partially offset by the decline in Spell / Grand Order, Aniplex’s popular mobile game which generates a large part of its revenues in Japan. On the positive side, music and mobile games are generally recession-resistant businesses – popular albums and new games could therefore breathe new life into musical unity.
However, Sony’s financial unit, which generates most of its revenue in Japan, could have difficulty if a full-blown recession occurs. Sales of its life insurance products may decline as consumers curb spending, while the value of Sony Bank’s investment portfolio may fall. This activity, which Sony plans to generate 17% of its turnover and 16% of its operating profit this year, could suffer the weight of a Japanese recession.
But will headwinds dominate downwinds?
The economic downturn in Japan will have an impact on Sony, but I think two main tailwinds – the growing demand for its image sensors and the upcoming launch of the PS5 – will help counter these headwinds. In addition, the next Tokyo Olympics in the summer could revive the Japanese economy if the coronavirus crisis ends.
Investors should keep an eye on Sony’s consumer electronics and financial services segments as Japan’s economic growth falters, but they shouldn’t panic and sell their shares in a well-managed, non-trading company only 15 times next year’s profits.