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How Sony (NYSE: SNE) gearing up to launch the highly anticipated PlayStation 5 video game console this holiday season, the PlayStation 4 seems to be coming out in style. The stock has nearly doubled over the past year in addition to strong results from Sony’s gaming business. For the first fiscal quarter, the company reported strong earnings results thanks to high engagement with the PS4 amid the COVID-19 pandemic.
Investors might consider Sony one of the top gaming stocks to consider in light of its recent performance and prospects for continued growth with the launch of the PS5. But before you take the plunge, here are three things you need to know about Sony’s biggest business.
Image source: Getty Images.
1. Sony does not need to sell more consoles to grow
The Gaming and Networking Services segment was Sony’s largest and most profitable division last quarter, contributing 31% of total sales and 55% of total operating profit. For fiscal 2019, games accounted for 24% of total sales and 28% of total operating profit.
Looking back 15 years to the fiscal year ending March 2005, Sony’s gaming segment generated $ 6.8 billion in sales, with $ 404 million in operating income. This was the peak of the PlayStation 2 generation, a console that sold 157.7 million units, Sony’s best-selling gaming system of all time.
The gaming business generated $ 18.1 billion in sales in fiscal 2019, or more than double what it did 15 years ago. Operating profit has vastly improved to $ 2.2 billion during that time. This growth occurs despite the fact that the PlayStation 3 and PlayStation 4 sell fewer units than the PlayStation 2. In perspective, the PlayStation 4 had sold 112.1 million units as of June 2020.
The installed base of PlayStation owners has not grown since the original PlayStation console was introduced in the 1990s. Sony has made up for this by selling exclusive in-house developed titles such as the latest best-sellers. Tsushima ghost and The Last of Us: Part 2as well as digital sales of games, content and other services, all of which have accounted for a growing share of gaming revenue on the PlayStation platform.
2. Sony is pushing the services side of PlayStation
The new generation of consoles launching with PlayStation 5 is more than just offering better graphics. Sony’s goal is to continue to increase subscriptions with PlayStation Plus and the cloud gaming service PlayStation Now.
As of June 2020, Sony had 113 million monthly active users on the PlayStation network. Of those, 45 million subscribed to PlayStation Plus, a service required to play online in multiplayer game modes, and it also offers players free games every month and special offers in exchange for a monthly subscription fee.
Cloud gaming has been the new buzzword in the video game industry for the past few years. Alphabet launched Google Stadia and Microsoft It has Xbox Game Pass, which allows Xbox users to access games on mobile devices. But Sony beat out its competitors when it launched PlayStation Now in 2014 as a rental service before transitioning to a subscription service in 2016.
PlayStation Now has grown from more than 700,000 users in March 2019 to 2.2 million in April 2020. Sony’s remote playback feature, which allows PlayStation 4 owners to access content on iOS devices, PC / Mac, and Android, increased monthly active users by 2.5 times. during the 2019 calendar.
The growth of these services is one of the reasons that earnings in the gaming segment have improved over the last 15 years, despite the lack of growth in hardware unit sales.
3. Streaming is the next step in Sony’s gaming strategy
Sony originally launched its PlayStation network business strategy on PlayStation 3 in 2006. Investment in network services did not fully take hold until the launch of PlayStation 4 in 2013. By then, Sony had introduced the PlayStation Plus service in 2010 and was capable to capitalize on the industry shift towards digital content distribution.
It is the extent to which Sony continues to develop digital services that will determine whether the games business will continue to grow sales and profits through the PlayStation 5 cycle and fuel the performance of stocks.
YCharts SNE data.
The momentum Sony has seen in recent years with the growing adoption of network services, such as PS Plus and PS Now, should continue with the PS5, given the company’s investments to expand the new console’s streaming capabilities, such as games in the cloud.
The stock has a price-earnings ratio of 15.9. One reason for the modest valuation is that Sony is involved in several business segments, including image sensors and consumer electronics, but the company is increasingly focused on smoothing out the volatility of annual earnings by increasing digital broadcast revenue. in the games and music businesses. Further progress on these fronts could be enough to keep this tech stock climbing higher over the next five years.
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