Sony Climbs as Games Outlook Makes Up for Earthquake Damage

  • Recovery anticipated on view that bad news is out of the way
  • Company forecast annual profit that fell short of estimates

Why Sony Shares Are Up Despite Profit Miss

Sony Corp. shares rose as investors ignored a weak profit forecast, looking instead to the company’s long-term prospects in entertainment and sensors needed for driverless cars and other emerging products.

The shares rose 6.5 percent to 3,072 yen at Wednesday’s close in Tokyo, the biggest jump since April 19, even after the company issued an annual profit outlook that fell short of analysts’ estimates due to costs for repairs after the Kyushu earthquake.

The impact of the quake and a slowdown in demand for image sensors that power cameras in smartphones -- including Apple Inc.’s iPhone -- are testing Sony’s ability to generate more of its earnings from PlayStation gaming consoles, streaming services for its 65 million online users as well as movies and music. Still, profit at Sony’s games and network services business will rise 52 percent to 135 billion yen ($1.2 billion) on anticipated sales of PS4 consoles this year.

“All the bad news is probably out for the time being, and we expect the focus to shift to the pace of recovery” in image sensor operations, Takeo Miyamoto, a Tokyo-based analyst at Mitsubishi UFJ Morgan Stanley Securities, wrote in a report on Tuesday after the earnings. The focus will also be on the “growth potential in the game and network businesses,” he said.

Net income will probably decline 46 percent to 80 billion yen in the 12 months ending March 2017, Tokyo-based Sony said in a statement. That compares with the 196 billion yen average of analysts’ projections compiled by Bloomberg.

For a Gadfly commentary piece on the health of Sony’s business, click here.

“There was no telling how much the damage from the quake would be, so the profit was bound to fall below consensus,” said Atul Goyal, an analyst at Jefferies Group. “The company’s guidance is still conservative. Sony’s movie, music and games businesses will do great this year, while prospects for image sensors will improve longer term.”

Operating profit will probably rise to 300 billion yen this fiscal year, short of the 400 billion yen predicted by analysts. That forecast reflects a negative impact of 115 billion yen from the earthquake, including the loss of potential sales, Sony said. Revenue is on on track to decline 3.8 percent to 7.8 trillion yen.

Chief Financial Officer Kenichiro Yoshida said Sony’s underlying business remains strong, despite the impact from the earthquake. 

“The company’s earning power has strengthened considerably,” Yoshida told reporters at a news conference. “We also seeing the impact of recurring businesses, such as the profit growth from PlayStation Network services.”

The company is looking to cement its lead over Microsoft Corp.’s Xbox One and Nintendo Co.’s Wii U consoles by launching a virtual-reality headset in 2016. Investors are confident in Sony’s ability to introduce new video-game products, like the VR headset, that will help it convert more PlayStation owners into video-game subscribers who pay monthly fees, said Jitendra Waral, a Bloomberg Intelligence analyst. Sony forecast sales of its PS4 consoles will climb 13 percent this fiscal year to 20 million units.

The smartphone business will report a profit of 5 billion yen in the year to March 2017, compared with a loss the previous year, Sony said. The industry is facing its first slowdown since Apple introduced the iPhone in 2007. While much of the drop in demand is seen in mature markets and China, where Sony no longer develops phones, the broader slowdown has implications for the image-sensor business, which supplies camera components to other handset makers.

Profit in Sony’s music business will decline 28 percent to 63 billion yen, Sony forecast in April. Sales will slide 11 percent from last year, when earnings included Adele’s record-breaking “25.” The chart-topping singer is in talks to sign a 90 million pound ($131 million) contract with Sony, the Sun newspaper reported, citing an unidentified source.

Last week, Sony resumed operations at its Kumamoto facility, which was shut down after the factory, clean rooms and equipment were damaged during the April 16 earthquake on the southern island of Kyushu. The impact from the seismic event, including repairs and lost sales, will be about 60 billion yen, it said.

“Despite the disappointing outlook, there is a lot less uncertainty surrounding Sony going forward,” said Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management Co. in Tokyo. “This is a much much more resilient company than we used to know.

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