Stock splits have suddenly become the rage this year. Electronics giant Sony Group(NYSE: SONY) has thrown its hat into this ring, joining companies such as Nvidia and Chipotle.
Sony announced a 5-for-1 forward-stock split to take effect Oct. 1. While this action lowers the price of individual shares, making them accessible to more investors, it doesn't necessarily mean Sony stock is a buy.
Also, determining whether to invest in Sony involves an additional wrinkle. The company plans to execute a partial spin-off of its financial-services business, known as Sony Financial Group (SFG). Let's dive into Sony to help you untangle all this, and decide whether shares are worthwhile to buy before the stock splits.
Where Sony is at today
Sony began as an electronics firm, but today, it's concentrating on entertainment. In its 2023 fiscal year, ended March 31, 2024, the company's music, film, and video-games divisions made up about 60% of its sales.
This revenue concentration plays an important role in its corporate strategy. Today's Sony sees its entertainment divisions as the source for future revenue growth. The firm calls this strategy "kando," the Japanese word for "feeling," since its goal is to spark an emotional connection with customers through its offerings.
The kando approach is working. For instance, the latest generation of its gaming console, PlayStation 5, is the most profitable to date. It produced $10 billion in operating income over the four years since its release in 2020. For comparison, the previous PlayStation 4 took seven years to reach operating income of $9 billion.
Although Sony is focusing on its entertainment businesses, it isn't trying to compete with Netflix or other major streaming services. Rather than take on the cost of building streaming infrastructure, Sony opted to sell its film content instead. It claims to be the motion picture industry's largest independent content provider.
Along with skipping the streaming wars, Sony acquired Alamo Drafthouse Cinema in June. The acquisition means Sony owns a chain of movie theaters, the first time a major studio has done so in 75 years.
Sony is also leveraging its technological expertise to enhance its entertainment offerings. For example, the company applied its video-game software to movie making by using it to project backgrounds onto giant screens alongside actors during filming. This allows filmmakers to make adjustments in real time, such as changing camera angles, which reduces the need for expensive reshoots.
The wrinkle for investors in Sony's stock-split plans
The one area of the conglomerate's operations that doesn't fit with its entertainment focus is the Sony Financial Group. It's a different type of business from the rest of the organization, centered on banking, life insurance, and other finance-related offerings. That's why spinning off SFG makes sense, giving it the independence needed to build its business.
The company's financials look better without SFG as well. Sony's sales in its fiscal 2024 first quarter, ended June 30, were up 12% year over year to 2.6 trillion yen ($18 billion), and operating income increased 25% to 249.1 billion yen ($1.75 billion) when excluding the SFG division. But with the SFG segment, Sony's revenue was up only 2%, and operating income rose 10% year over year.
The SFG spin-off is scheduled for October 2025 and involves exchanging some Sony shares for ones in the new company. So deciding to buy Sony stock as a long-term investment before its stock split means assessing whether you want to own shares in the financial-services spin-off.
One benefit to owning the spin-off's stock is as a source of passive income, since the new company will pay dividends. I dug into the pros and cons of owning SFG shares in this article to help you with the decision.
To buy or not to buy Sony stock
While Sony shares aren't far from their 52-week high of $100.88, the stock's valuation appears attractive when compared to entertainment competitors such as Netflix and Disney. Looking at the price-to-earnings ratio (P/E), a widely used metric to assess stock valuation, for each of these companies, Sony stock looks undervalued.
Data by YCharts.
Another consideration is what Wall Street thinks. The current consensus among Wall Street analysts is a "buy" rating with a median share-price target of $111.16 for Sony stock.
Taking these elements into account along with its differentiated kando strategy, Sony looks like a compelling investment for the long haul. That said, owning shares in its financial-services spin-off is another matter. Some details about the spin-off company have yet to be announced, such as the frequency of dividend payments.
Since stock splits don't change the market value of a stock, and Sony's share price isn't far from its high, there's no rush to buy before its stock split. Instead, wait for more details about the spin-off to make an informed decision. In the meantime, it's best to put Sony on a list of investment opportunities to watch.
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Robert Izquierdo has positions in Chipotle Mexican Grill, Nvidia, and Walt Disney. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Netflix, Nvidia, and Walt Disney. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
