Our stock of the week has a computer games theme and our Twitter followers have chosen Sony, maker of the hotly anticipated PlayStation 5, which is due to launch for Christmas.
Consumer electronics giant Sony (6758) dates back to 1946 when Japan was starting to rebuild its industry after the second world war. Since then, it has branched into televisions, digital cameras, music equipment (remember the Sony Walkman and Discman?) and now robotics and image sensors.
Today the company’s gaming division is its largest, making up around 25% of annual revenues, and 25 years after its launch the PlayStation is still the most popular games console in the world.
But despite this dominance in electronics, Sony does not possess an economic moat, according to Morningstar analysts. The success of South Korean rival Samsung (005390) over the past 20 years is one reason for this; Samsung overtook Sony as the world’s most popular flat-screen TV maker and then decided to take on the Apple iPhone with the launch of its Galaxy smartphone. Chinese manufacturers such as Hisense and Xiaomi have also stepped into the electronics sector to undercut Sony and other established brands on price.
This is an issue, says Morningstar analyst Kazunori Ito, because electronics consumers are increasingly fickle and demand replacements every few years, often choosing on price rather than brand. “As technologies and consumer preferences change quickly, it is generally difficult for consumer electronic companies to build up an economic moat,” says Ito. “The replacement cycle of digital appliances is usually three to six years, but as most products are commoditised, it is hard for manufacturers to build an ecosystem that prevents customers from moving to different manufacturers.”
One area where customers are loyal, however, is in gaming. Ito says the PlayStation’s strong pipeline of game franchises helps here. The latest console, for example, is being relaunched alongside a new edition of racing game Gran Turismo.
PlayStation rival Xbox (made by wide moat Microsoft) is also launching a new console, but Ito thinks Sony will have the edge because of its loyal user base and competitive pricing.
We have written about how the computer games industry has moved on from the console-and-cartridge model that was so lucrative for the likes of Sony in the past. The firm has been quick to take advantage of new trends, launching a monthly subscription service as well as cloud and virtual reality gaming. For the first time, the PlayStation will come as a cheaper digital addition without a disc drive.
The announcement of the PlayStation 5 triggered a rise in Sony’s fair value estimate to 8,000 yen (£59), and the shares are currently trading just above that level. Like many computer games and console companies, Sony has benefited from the enforced stay-at-home trend that has so far defined this year. Its shares are up around 10% in 2020 so far but the price is still below where it was 20 years ago, reflecting the increase in competition over that period.
Which UK funds hold Sony? The company makes up 6% of Janus Henderson Japan Opportunities, 2.50% of Baillie Gifford Japanese fund and 2.30% of Bronze-rated Baillie Gifford Japan Trust (BGFD), according to Morningstar Direct data. Among passive funds, Gold-rated HSBC Japan Index owns the stock, which makes up 2% of the tracker fund.
Japan has recently undergone some political turmoil after Shinzo Abe stepped down because of ill health, so global investors are awaiting developments after Yoshihide Suga was announced as a successor.