SONY GROUP CORPORATION

Date of Publication: 12-4-2022

Date of Most Recent 20-F: 6-28-2022

Quick Preface: Sony is a large and diverse company with a global presence. It operates in many different industries, including electronics, gaming, entertainment, and financial services. As a result, analyzing the company can be challenging, as it requires understanding multiple different businesses and their performance. Additionally, the fact that Sony is a Japanese company means that its financial statements and filings may be different from those of domestic companies, requiring a deeper understanding of Japanese accounting standards and practices. Additionally, conducting the analysis in Yen, rather than in a more commonly-used currency, can add another layer of complexity. Despite these challenges, I believe that Sony is a fascinating and worthwhile company for analysis, and that including both of its main business segments in the analysis is essential for accurately understanding the company's performance and prospects.

Notes on Financial Projections: As shown later in the analysis, I used the reverse-method, which involves using certain concrete assumptions and varying the growth rates projected, in order to solve for the current share price. I'd also point out segment growth rates as they relate to both the operational sales and financial services sides of the business. Generally, double digit growth can be expected for the fiscal year ending in June, 2023, assuming a decreasing growth rate going forward. I generally look to growth rates, since I kept the cost structure of the business relatively the same. Most of these costs, including non-Income Statement items, can easy be traced to average percentages of either total sales, operational sales, or financial services revenue.

WACC & Valuation Notes: Sony Group Corporation, like many large corporations, is mostly funded by equity. This means that the required return for equity shareholders, which is determined by the Capital Asset Pricing Model, is the most significant factor in the cost of capital calculation. Using a standard market return and a low beta, as well as the US 5-year Treasury, the cost of capital for Sony is less than 8.00%. It's worth noting that the market capitalization for Sony listed on a US exchange requires a currency conversion, which could introduce additional variability in the future. This potential issue is compounded by the fact that this report was published nearly six months after the company's annual report.

For the valuation process, the utilization of the Exit Multiple Method is particularly advisable, due in large part to its conformity with industry standards and its facility for predictive calculations. It is critical to note, however, that the implied share price is highly sensitive to the industry exit multiple, which is a common occurrence among comparable companies. Another salient factor to mention is the typically high number of variables that are present within this analysis, such as the location of operations, business segments, and exchange rates of currencies. Despite these challenges, I have made every effort to generate the most realistic market-expectation that determines the current share price through the application of the DCF model.

My Key Takeaway: In summary, Sony's future growth is heavily dependent on the success of its entertainment division and its strategic investments. As mentioned in its 20-F filing and summer conference call, sales projections will be crucial to its future performance. There are two points that stand out to me about Sony: 1) the company has a current observed Beta of 0.88 and 2) it has relatively conservative assumptions for its future performance. Considering these two factors, I believe that Sony is undervalued and has less systematic risk than some technology companies.

The key players in the market may be overvaluing future performance and placing too much weight on current macroeconomic trends that are negatively affecting the market. However, with the Federal Reserve implementing stricter fiscal policy and a positive impact on inflation from previous efforts, it is likely that Sony's performance will not be significantly impacted by market trends. I would recommend proceeding with caution and considering a long position in Sony Group, as well as implementing a conservative stop loss to hedge against potential risks.

DECISION: Underweight, and current macroeconomics, market pressures, and performance metrics are positive indicators for a long position in Sony Group Corporation.

Appendix: I've included a download link to the Excel file I used to drive my assumptions, and feel free to take a look.