TOKYO — Shares in Sony Group fell sharply on Friday, slipping nearly 8%, with investors disappointed in the company’s weak earnings outlook for the current fiscal year.
Sony’s stock price closed down 7.7% at 10,900 yen ($100) in Tokyo, hitting almost a two-month low. The conglomerate, which is included in Japan’s blue-chip Nikkei Stock Average index, had the second biggest percentage drop out of the 225 companies that comprise the benchmark.
The sharp decline was prompted by Sony’s earnings announcement on Wednesday, which left investors feeling underwhelmed. (Tokyo’s stock market was closed on Thursday for a national holiday).
The electronics-to-entertainment conglomerate revealed its forecast for the year ending March 2022 in which net profit is expected to decline 44% to 660 billion yen and operating profit to drop 4% to 930 billion yen. Although the company anticipates revenue to rise 8% to 9.7 trillion yen, its growth rate is shy of last year’s 9% jump (Sony is using IFRS accounting standards beginning this fiscal year, which started on April 1, hence, year-on-year comparisons may not be exact).
The guidance for both its net profit and operating profit fell short of analysts’ expectations, and gave some investors the impression that Sony’s unprecedented growth, which began last year, has run its course, along with the pandemic-induced gaming fever.
For the year through this past March, Sony logged a record 1.1 trillion yen in net profit, a jump of 101% compared to a year-earlier, while operating profit also hit a record, rising 15% to 971 billion yen. The stellar performance was largely due to a booming games business, as subscription-based services enjoyed an increase in the number of users amid the pandemic.
The massive profit lift, however, set the bar high, and Sony now expects fewer software sales this year as well as rising game development costs to put downward pressure on profits.
Sony revealed that it plans to sell over 14.8 million units of the next-generation PlayStation 5 console for the current fiscal year. It also admitted that it has been unable to meet the strong demand as the global chip crunch squeezes production.
Morgan Stanley MUFG Securities analyst Masahiro Ono notes in his report that the “scope for upside from PS5 sales expansion is limited.”
Sony forecasts annual operating profit for its gaming business to drop 5% to 325 billion yen.
Ono also points out that Sony’s outlook for its music segment “seems most conservative.”
The conglomerate forecasts a 14% fall in operating profit for its music segment, which includes its anime-related business that now has the smash-hit movie “Demon Slayer” on its hands.
Sony “assumes retracement after the Demon Slayer hit in fiscal 2020,” Ono said, adding that “The strong start for this title in April in North America has not been taken into account.”
Sony’s share price had risen considerably after the pandemic-driven market sell-off. As earnings improved, its stock price soared 39% in 2020. In February the price reached its highest level since 2000. This also led to some of Friday’s profit-taking as investors wanted to lock in gains.
Kota Ezawa, an analyst at Citigroup in Tokyo, said in a report that investors are likely “to take a dim view of the weak-looking projections for PS5 sales and the new midterm plan.”
Together with the earnings forecast, Sony announced a new midterm financial target of 4.3 trillion yen in cumulative adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the next three years.
Ezawa points out that “this may be only around 20% higher than the results achieved in the three years through [fiscal 2020]. We believe Sony possesses wide-ranging growth potential, and think a target focused on profits (cash flow) over three years and amounting to a [compound annual growth rate] of less than 10% may appear disappointing to market participants expecting growth.”
