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Sony and Microsoft Struggle With New Console Demand

GuruFocus.com
·4 min read

- By Graham Griffin

Tech giants Sony Corp. (NYSE:SNE) and Microsoft Corp. (NASDAQ:MSFT) have released their competing, next generation consoles into a market where demand far exceeds supply.

With the pandemic limiting the production of movies and television, notably televised professional sports, consumers were forced to shift their focus to other forms of entertainment. The global gaming industry in particular has seen a massive surge during the pandemic as companies have struggled to keep up with new demand.


Earlier this year, as pandemic lockdowns reached full effect, Nintendo Co. Ltd. (TSE:7974)(NTDOF) was the first company to be targeted by consumers. Within weeks of the shutdowns, Nintendo's Switch console, alongside its wildly popular game "Animal Crossing," was sold out across the country. Black market sales saw Switch consoles going for triple retail value and the stage was set for Sony and Microsoft's current struggles.

Sony

For Sony, the debut of the PlayStation 5 console came at an ideal time. The company has seen its other businesses, such as the Sony Pictures Entertainment and electronics products divisions, with profits decreasing. According to Bloomberg, the PlayStation business accounted for more than 40% of Sony's operating profit in the six-month period ending in September.

Sony even went so far as to double down on the PlayStation 5 debut with a new game release starring the Sony-produced movie superhero Spider-Man. The newly released console should serve to establish new sales growth as its predecessor, the PlayStation 4, was seeing sales dwindling. Sony leadership believes they will be able to sell more than 7.6 million PlayStation 5 units, the amount of PlayStation 4 consoles sold in its debut year, by the end of March 2021.

For Sony to reach this sales goal, the company will first have to combat its struggles to keep up with demand. Just two short days after its release, the PlayStation 5 has already sold out on all major sites in Japan. The consoles can now be seen fetching prices well over $1,000 on resale sites, despite the consoles $400 to $500 price tag.

As of Nov. 12, the stock was trading at $87.31 per share with a market cap of $107.70 billion. The GF Value line shows that Sony is trading at a significantly overvalued level.

Sony and Microsoft Struggle With New Console Demand
Sony and Microsoft Struggle With New Console Demand

GuruFocus gives the stock a financial strength rating of 6 out of 10, a profitability rank of 5 out of 10 and a valuation rank of 3 out of 10. The company shows two severe warning signs for declining revenue per share and an Altman Z-Score of 0.96, placing it in the distress column.

Major guru shareholders include Mario Gabelli (Trades, Portfolio), Jim Simons' (Trades, Portfolio) Renaissance Technologies and Steven Cohen (Trades, Portfolio).

Microsoft

Making much smaller waves, Microsoft has also run into supply struggles with its new Xbox Series X. Back on Sept. 22, when the Xbox Series X went up for pre-order, the consoles made available sold out within a matter of hours, much like with the PlayStation 5.

Since then, head of Xbox, Phil Spencer, has publicly stated that the demand for the new consoles will likely outpace supply into next year. "We know what our supply will look like basically for the rest of the year. We're going to have more demand than we do supply," Spencer said.

Even gamers who were lucky enough to have placed a pre-order on the new console have run into the supply struggles. The new console was expected to ship and arrive on doorsteps Nov. 10, but an unknown number of people who pre-ordered through Amazon (NASDAQ:AMZN) instead received emails about their orders being delayed. The emails state that consoles will be shipped as they arrive throughout this month up until the end of the year.

As well, the flagship "Halo" video game series has seen its next title pushed back until next year, leaving the new Xbox Series X to debut without a launch title. Compared to Sony, Microsoft's Xbox division makes up a much smaller portion of its overall business.

On Nov. 12, the stock was trading at $215.07 with a market cap of $1.63 trillion. The GF Value line shows that it is significantly overvalued.

Sony and Microsoft Struggle With New Console Demand
Sony and Microsoft Struggle With New Console Demand

GuruFocus gives the stock a financial strength rating of 7 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 1 out of 10. There is currently one severe warning sign issued for assets growing faster than revenue.

Top guru shareholders include Steven Romick (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), and Mark Hillman (Trades, Portfolio).

Despite struggles to keep up with new console demand, both Microsoft and Sony have seen success with the game streaming services. Microsoft's Xbox Games Pass now offers over 100 titles and has grown to over 15 million users. Sony also reported growth in its PlayStation Plus service during the third quarter as a result of increased digital consumption during the pandemic.

Disclosure: Author owns no stocks mentioned.

Read more here:

  • Value Investing Live Recap: Chip Rewey

  • Hillman Capital Management's Biggest Portfolio Changes for the 3rd Quarter

  • Kahn Brothers' Biggest 3rd-Quarter Sells



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This article first appeared on GuruFocus.