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While market darlings like Amazon.com, Inc. (NASDAQ: AMZN ), NVIDIA Corporation (NASDAQ: NVDA ), and Alphabet Inc (NASDAQ: GOOG ,NASDAQ: GOOGL ) dominate the daily headlines, there are high-growth tech stocks flying under the radar in this market that are just exploding higher.
One such hidden gem is Japanese electronics maker Sony Corp (ADR) (NYSE: SNE ). Perhaps best known as the manufacturer of the Playstation gaming console, televisions, and headphones, SNE stock has rallied more than 65% this year. That is a better 2017 showing than any of the FANG stocks.
Source: Dalvenjah via Flickr
Why the big jump? SNE is seeing big growth in its highest margin segments- music, games, and semiconductors. The drivers of big growth in those business look like they are here to stay, so investors are re-pricing the stock to match higher long-term growth expectations.
Is this rally over? Almost. But not yet.
I think this stock remains attractively valued until it hits $50. At that point, SNE stock looks maxed out. That implies another roughly 10% upside from current levels.
SNE Stock Bolstered by Strengthening Growth Outlook
Sony's business breaks down into multiple segments.
There is the gaming business, which makes money primarily from Playstation sales. This business is doing well, thanks to growing demand for next-gen video game consoles as well as the explosion in eSports and the huge digital shift in the video game industry. With augmented and virtual reality catalysts right around the corner, this business has solid growth prospects over the next several years.
That is particularly good news for SNE stock bulls, since this business has healthy operating margins.
There is the imaging business, which makes money from selling cameras. This business isn't doing as well, but it is bouncing back this year as unit camera sales may have bottomed. I don't think this bump will last. With smartphones doubling as cameras, standalone camera sales will likely keep falling.
The imaging business carries pretty good margins, so a loss of business here does hurt.
But that loss should be more than made up for by strength in the semiconductor business, which is red-hot right now and carries sky-high margins. As mobile phone demand continues to ramp, Sony's semiconductor business will continue to roar higher. This will be significantly additive to operating profits.
The low-margin mobile business is sputtering, but that business actually runs an operating loss so declining revenues there don't mean much. Meanwhile, the healthy-margin home theater and music business are growing nicely. This growth should continue thanks to consumer tech innovation.
All in all, then, it's pretty easy to see what is happening at Sony. The company's high-margin segments are accelerating, while the low-margin segments are sputtering. That combination implies healthy earnings growth prospects over the next several years.
The Street is modeling for roughly 8% earnings growth over the next several years. I think that's light. During this transition period, Sony has consistently topped earnings expectations.
I think that trend continues. I'm modeling for roughly 10% earnings growth over the next several years.
That 10% growth rate is comparable to what analysts think the market-wide earnings growth rate will be over the next several years. But the market is trading at 19.6x this year's earnings. SNE stock is trading at just 18.6-times this year's earnings.
A 19.6x multiple on roughly $2.50 earnings estimates implies a price target of $49.
Bottom Line on SNE Stock
SNE stock has made a huge run this year, but it looks the end is close.
This stock start will start to look and feel maxed out once it hits $50. That is less than 10% higher than the current SNE stock price.
That upside profile doesn't excite me. I'll pass.
As of this writing, Luke Lango was long AMZN, NVDA, and GOOG.
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