Last month, Japanese conglomerate Sony Group (SONY 1.71%) announced a 5-for-1 stock split. Although stock-split stocks can carry interesting investment prospects, there are some important details smart investors might want to unpack before loading up on the company's stock.
I'm going to explore how Sony's business is performing and take a look at the long-term trend for investors. While shares are down 15% so far in 2024, the company's stock split may be coming at just the right time -- and now could be a lucrative opportunity to start building a position.
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1. Sony's business: What's working and what isn't
From its gaming console PlayStation to its premium consumer electronics devices such as televisions and cameras, as well as entertainment content across movies and streaming shows, Sony is just about everywhere.
While its range of businesses provides it with broad diversification, the company faces intense competition across its major product lines. Nevertheless, for the company's 2023 fiscal year (ended March 31), Sony reported record revenue of about 13 trillion yen ($82 billion).
What's even better is that Sony's revenue increased in all of its reportable segments, save for entertainment, technology, and services, which posted flat sales year over year. On the surface, this looks like an encouraging business.
However, there are a couple of lowlights that investors should be aware of -- namely, Sony's revenue growth in fiscal 2023 came at the expense of expanding profitability. For the year ended March 31, Sony's net income was 970 billion yen ($6 billion), a 3% decrease from the prior year.
According to the company's filings, the main contributors dragging down profits were Sony's imaging and sensing solutions business, as well as its financial services operation. The latter posted a 45% annual decline in operating income.
On a positive note, management has addressed the weight that Sony's financial services business has on the overall company. As of now, the company is planning a partial divestiture of the financial services operation.
While this restructuring isn't projected to be completed until October 2025, long-term investors should keep in mind that should Sony execute the spinoff, it will be better-positioned to focus on core growth drivers and more profitable operations.
2. How has Sony stock performed since its last stock split?
It's been more than 20 years since Sony's last stock split.
Per the chart above, shares of Sony are down roughly 13% since the time of the company's last split in May 2000. I surmise there's quite a bit of frustration among investors who have held Sony stock during this period.
The company's long-term performance since its last split doesn't leave much to be desired, and it's in the middle of some complex restructuring initiatives that are weighing on profits. As a result, there's a potential catalyst in sight that could be what Sony needs to ignite its business to the next level.
3. The secret opportunity hiding in plain sight
Right now, artificial intelligence (AI) is the big-ticket item in the technology world. While Sony might not be the first name that comes to mind when you think about AI, it actually has many ways to benefit from the technology.
AI has numerous applications when it comes to gaming, cameras, and visual-imaging capabilities. These are all areas in which Sony operates through its consumer electronics businesses.
Moreover, I'm speculating that AI will also begin to make inroads in the entertainment landscape, as well as through the power of virtual and augmented reality. I see all of these use cases as bellwethers for Sony in the long run.
I think shares of Sony have gotten beaten down a bit too harshly. Overall, the company is performing from a position of strength across its major divisions, and profits are only waning due to a business that will eventually be divested.
While near-term profits may be murky due to the ongoing spinoff efforts, the long-term potential shouldn't be overlooked. Sony should be a financially stronger business following the financial services spinoff. As AI continues to become increasingly ingrained in the tech world, I wouldn't be surprised to see the company emerge as a hidden gem benefiting from the technology.
I think now is an interesting time to scoop up shares of Sony while keenly monitoring the company's progress.
