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We're all familiar with how an ugly caterpillar turns itself into a beautiful butterfly in a process called metamorphosis. A similar transformation can happen in the corporate world too, although it is much more rare.
However, there is one ongoing corporate metamorphosis that has been going on for several years now.
The company is Sony Group Corporation (SONY) and its transformation has already been remarkable. The company has morphed from being Japan’s best-known consumer electronics brand into a blend of specialist-hardware maker and international media giant. Sony's wide-ranging portfolio spans music, video games, semiconductors, electronics and finance.
While Sony generated more than 40% of sales from electronics in fiscal 2012, that accounted for only around 20% in fiscal 2022, as entertainment has grown to more than half the total.
This metamorphosis is still underway. We saw evidence of that recently, on May 18, that sent the stock soaring after the announcement. Let me fill you in on this latest development. . .
Sony Sheds Its Financial Business
Sony Group will spin off its financial unit to focus resources on its entertainment and image sensor operations. It is considering a stock market listing by Sony Financial Group within the next two to three years. Sony Group will maintain a nearly 20% stake in the company.
Thanks to Japan's tax reforms for fiscal 2023, companies can now qualify for tax relief when spinning off a unit, as long as they reduce ownership to below 20%. Previously, they had to unwind their entire stake. Sony began considering its current plan for its financial subsidiary in February in light of this change. It is on track to become the first company to take advantage of the tax benefit.
Three years ago, Sony spent $3.7 billion to take full control of its financial unit, which houses the group’s online banking and insurance businesses. Then-Sony Group President Kenichiro Yoshida had positioned financial services a "core operation" at the time.
The move came despite pressure from U.S. activist investor Third Point and its founder Dan Loeb to break up and focus on entertainment. Many others also noted the lack of synergies with the company’s other businesses.At the news conference announcing the move, Sony’s newly appointed president Hiroki Totoki said a partial spin-off of its financial arm was necessary to strengthen its investment capacity. “In order to expand our growth over the medium to longer term, we will need the ability to invest in image sensors and the entertainment business at a completely new level,” Totoki said.
It is working to bolster its competitiveness in individual fields. In the period from fiscal 2018 to 2022, the company invested around 1.2 trillion yen (about $8.66 billion) into both intellectual property, like video games, and the semiconductor sector, including image sensors. Here's a few highlights about both segments. . .
Sony's image sensors have two features: backside illumination and a stacked structure. Since both factors improve picture quality, Sony has increased its market share.
For instance, Apple (AAPL) has used Sony's image sensor from the iPhone 4 onward for the rear camera, and from the iPhone 6 for the front camera. Sony's global market share for image sensors was estimated to be 44% in 2021.
In the past five years, Sony went on an acquisition spree to expand its entertainment assets, buying EMI Music Publishing for $2.3 billion and spending $1.2 billion to acquire AT&T’s anime streaming service Crunchyroll.
Sony now has the world's largest portfolio of anime, as well as 10 million paid subscribers to the now profitable Crunchyroll.
And make no mistake, anime is big business.
The most recent figures available, from 2021, show the global market for Japanese anime grew to a record high $20 billion. And the market for anime outside of Japan was about half of that total. In addition, estimates produced by SkyQuest Technology Consulting say that the global anime market is now growing at about 10% a year and could reach a value of over $47 billion by 2028.Sony to Become a 'Butterfly'
I believe the IPO of Sony Financial is consistent with the company’s plans to scale up its investment in both image sensors and entertainment. The eventual initial public offering of Sony Financial will to be used to help fund aggressive merger and acquisition activity by the company. After all, consolidation in entertainment is happening rapidly and Sony doesn’t want to be left behind.
In simple terms, the IPO of Sony Financial will give the company the financial flexibility to pounce when new opportunities present themselves.
It will also help remove some of the 'conglomerate discount' for Sony, where its valuation is less than what the sum of its parts would be if they were all listed and traded on a stock exchange.Finally, it will allow Sony's management to focus on continuing to drive synergies between its business lines. For example, during that same news conference I mentioned earlier, Sony said its hit drama, "The Last of Us" on HBO, drove uptake of the game franchise on which it is based and music used in the show.
Sony plans to follow this successful strategy with more titles. These include Horizon Zero Dawn, which is being produced for Netflix (NFLX), and God of War for Amazon (AMZN) Prime Video.
This metamorphosis has already catapulted Sony to becoming Japan's third-most-valuable company, behind only Toyota Motor (TM) and sensor maker Keyence (KYCCF).
I expect much more to come as its media/entertainment business continues to grow. The stock is trading around $98, up more than 28% year-to-date. However, it is still below its all-time high, hit in late 2021, of around $121 a share.
I believe SONY stock is a buy, especially anywhere below $100, but even as high as $105.
On the date of publication, Tony Daltorio did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
