Loeb’s four-point strategy
Dan Loeb argued last week that while Sony (SNE) has long been considered an electronics company, it generates ~75% of its profits from four “crown jewels”: gaming, music, pictures, and semiconductors. Let’s break down Loeb’s four-point strategy to unlock value in Sony’s stock.
- Spin off the semiconductor business as a standalone public stock.
- Position “New Sony” as an entertainment company.
- Divest public equity stakes in Spotify (SPOT), Sony Financial, M3, and Olympus.
- Optimize capital structure.
Spinning off Sony’s semiconductor business
As per Loeb, one of the key factors that could unlock value for Sony (SNE) would be the spin-off of its semiconductor business.
Despite being a market leader in the image sensor market with a revenue market share of 51%—more than twice the share of the number-two player, Samsung (SSNLF)—this unit contributes just 18% of Sony’s consolidated earnings.
Overall, Sony’s valuation is depressed compared to its peers in individual core segments. According to Third Point’s presentation, Sony is trading at an EV-to-forward EBIT of 8.0x, much lower as compared to its semis peers (SMH). Texas Instruments (TXN), Qualcomm (QCOM), Broadcom (AVGO), and Intel (INTL), have multiples of 16.0x, 12.8x, 10.4x, and 9.2x, respectively.
Potential for image sensors and the semiconductor business
About 80% of Sony’s semiconductor business comes from image sensor sales, a $13 billion market growing at >10% per year. The image sensor market is expected to continue to grow as mobile device producers keep innovating and competing. The adoption of rear and front dual cameras in smartphones, rising demand for security cameras, and the use of imaging systems in vehicles—especially in self-driving vehicles—are some of the factors fueling demand for image sensors.
Moreover, during the company’s Investor Day fiscal 2019, Sony itself called for a long-term plan of 5%–10% organic revenue growth, 10%–15% profit growth, and market share growth from 51% in fiscal 2018 to 60% by fiscal 2025.
In its sum-of-the-parts valuation, Dan Loeb’s Third Point values Sony’s semiconductor business at $22 billion. Also, given the company’s own plans to drive long-term growth and given that it’s able to execute on this path, Loeb feels that the semiconductor business could be worth $35 billion in five years.