Despite being down sharply for October, we've seen this picture before from Sony (NYSE: SNE ). Near the end of April, the Japanese consumer-electronics firm released a disappointing fourth-quarter fiscal 2017 earnings report. After truly coming alive late last year, SNE stock quickly tumbled as rattled investors ran for the exits.
At the time, I argued that the bears were being short-sighted . During the incredible run-up in Sony stock, the underlying company justified the market sentiment. Since Q4 2016, four consecutive SNE earnings reports exceeded their consensus profitability targets. Further, Q1 2017 through Q3 2017 featured earnings beats of increasing magnitude.
However, that story came to a shuddering halt in Q4, understandably causing investor panic. What those who fled didn't see apparently was the context. Yes, SNE missed key financial targets, but many of those losses came from known vulnerabilities, such as the mobile unit and "Imaging Products & Solutions."
More importantly, management has addressed those weaknesses via moving into lucrative sectors. Taking their expertise in smartphone sensors, they shifted focus to surveillance products and automotive solutions.
This latter point is especially critical for Sony stock long-term. Recently, and just before the SNE earnings for Q2, management announced that they developed the world's first "CMOS Image Sensor Capable of Multiple Sensor Connection to a Single MIPI Input Port for Sensing Applications."
In English, Sony developed a significantly more efficient channel between the imaging sensors and the data-input portal. This translates to major advantages, such as less wiring requirements, energy efficiency and superior imaging acuity.
But is SNE stock pricing in what could be a gamechanger? No. Instead, the Street is again focusing on the here and now. Plus, the global selloff - especially in Japan - is detracting from a legitimate turnaround story.
SNE Earnings to be Overshadowed by Poor Timing
Unfortunately, I'm not sure that even an outstanding SNE earnings report will be enough for Sony stock. As I previously stated, the volatility in benchmark indices is a substantial headwind. It also doesn't help that Microsoft (NASDAQ: MSFT ) produced a strong quarterly beat but shares are still disappointingly down for October.
Adding to the pensiveness is expert sentiment. For Q2 earnings per share, the sole covering analyst expects 91 cents.
However, the revenue side provides a more optimistic picture. The consumer-electronics firm is expected to bring in $19.1 billion . If Sony hits that mark, this would translate into a 2.6% lift year-over-year.
Still, in order for Sony stock to stop the October bloodshed - shares are down 7% for the month - management must deliver a compelling story. Simply meeting revenue consensus is not enough. For instance, in Q1 2018 (the quarter ending June 30, 2018), sales increased 7.1% YOY . In Q4 2017, enjoyed a 7.5% YOY bump.
I believe that over the long run, SNE stock has the potential for serious growth. For one thing, a lot of folks dismiss Sony as a "has been." In their eyes, SNE, like Japan Inc, was relevant in the 1980s and early 1990s. But this also provides a classic contrarian play.
Better yet, these same people don't appreciate that Sony is undergoing a slow but steady paradigm shift. Despite their CMOS image-sensor innovation being wonky as heck, it opens new markets for the consumer-tech firm.
Primarily, the enhanced acuity under high-speed conditions is a boon for driverless technologies in both effectiveness and safety. It also plays well into the drone market and potentially the defense industry , something to which the Japanese government has expressed interest.
Patience Is the Key for SNE Stock
But will these forward-looking items be enough for SNE stock in its upcoming earnings report? Despite that I worked at Sony for most of my career, and am still a shareholder, I must admit this: things don't look too hot.
It's a situation where the markets are absorbing the current panic as opposed to the longer-term opportunity. As such, Sony stock is in a similar place with Amazon (NASDAQ: AMZN ). While the five- or 10-year outlook is very positive for AMZN, the markets are in a risk-off environment.
Still, if you're feeling the contrarian urge, I'd look into SNE stock. With shares getting hit hard from the October volatility, SNE is incredibly undervalued. It's even more so when you factor in the innovations that are quietly priming the company for future growth.
As of this writing, Josh Enomoto was long SNE.
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