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In a pandemic, video games are serious business. Sony is set to post a record net profit for the year to March on surging demand for home entertainment. The Japanese electronics group may be about to get a longer term boost from an unlikely source. Consoles, once dismissed as obsolete, are extending their working lives.
Sony’s film and games businesses were behind stronger-than-expected operating profits. These rose a fifth in the third quarter and contributed to an upward revision in its forecast to $8.9bn for the year.
The November launch of the next generation PlayStation 5 console played a large part. Sony has sold 4.5m units since its release. Sales of high margin services such as online gaming subscriptions have taken off too, helping offset the steep marketing costs from the PS5 launch.
Yet shares of Sony languish at an enterprise value of 1.6 times forward sales, a sharp discount to local gaming peers, even after a gain of two-fifths in the past year. That reflects looming hurdles on top of the group’s conglomerate discount.
A supply crunch is one issue. Console supply has lagged demand. Even older models such as the PlayStation 4 — for which sales would normally taper off once the launch of the next model is announced — has been in demand among shoppers looking for lower priced options. Sony stopped shipping most PS4 models to local retailers in September.
That shortfall will worsen. A global chip shortage has hit the smartphone and auto sectors. It is starting to squeeze console makers. Narrower sales channels are an issue too — queues outside stores are risky in current times.
The good news for investors is that bigger forces are playing in Sony’s favour. Unprecedented demand for video games pushed the size of the world market up by nearly a fifth last year. That should continue well into this year. Now that demand extends beyond the latest models, the console’s revenue cycle could start to stretch out beyond its typical four-year mark, boosting profits.
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