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Sony's stock swoons amid worries its portfolio 'is in trouble'

Key Points
  • Japanese tech giant Sony's portfolio "is in trouble," said Ray Wang, principal analyst and founder at Silicon Valley-based Constellation Research.
  • Wang's comments came on the back of Sony cutting its revenue outlook for the fiscal year. The company's stock responded to that news with a significant decline on Monday.
  • Investors are closely watching the firm's gaming business. That division is the largest contributor to the company's operating income at more than 30 percent.
A woman plays ASTRO BOT Rescue Mission at a Playstation VR display at the Sony Exhibit at the Las Vegas Convention Center during CES 2019 in Las Vegas on January 9, 2019.
David McNew | AFP | Getty Images

Investors are running for cover after Sony delivered its latest results and guidance: Shares in the Japanese tech giant tumbled 8 percent in Monday trade.

Underlying that one-day move is a concern that the company's portfolio "is in trouble," according to one analyst.

The company is in "highly competitive areas with declining unit sales and margin," Ray Wang, principal analyst and founder at Silicon Valley-based Constellation Research, told CNBC over email.

"They have a bad hand and need to change ... their portfolio," Wang said.

Wang's comments came on the back of Sony cutting its sales and operating revenue forecast for the fiscal year. In particular, investors are closely watching the firm's gaming business. That division is the largest contributor to the company's operating income, comprising more than 30 percent in the first three quarters of Sony's fiscal year.

The company sold 8.1 million units of its flagship PlayStation 4 (PS4) gaming console in the third quarter, according to its earnings release. That was lower than the same quarter of the previous fiscal year, but "in-line with (the company's) expectations for this sixth year of the platform," Sony Chief Financial Officer Hiroki Totoki said at a Friday earnings briefing.

Slowing sales of PS4 hardware and a negative impact from foreign exchange rates outweighed an increase in game software sales to drag down the segment's operating income as compared to the previous year, according to Totoki.

Following the earnings release, Sony's shares took their big Monday drop.

"Investors are disappointed with Sony's declining operating profits at its core gaming division," said Leo Sun, a tech and consumer goods specialist at The Motley Fool.

Sun said the decline in PS4 hardware sales "wasn't surprising" given the age of the platform, but "investors likely expected the PS4 Pro, PS4 Slim, and PS VR to give the hardware business a little more juice," in reference to the different variants of PS4 hardware and its peripheral virtual reality headset.

"It was also disappointing compared to Microsoft's 9% year-over-year constant currency growth in gaming revenues in its latest quarter, " he said. A constant currency calculation attempts to nullify the impacts of exchange rate fluctuations.

Overall, Constellation Research's Wang said, Sony's content — including movies — remains "the brightest spot" and its cameras business "is still growing."

But, he said, the company still needs "a content, network, and tech strategy in order to create vertically integrated markets."

Nomura still says it's a buy

Nomura on Friday reduced its target price for Sony's shares but maintained its "buy" rating on the stock despite the tech giant's slash in forecasts.

Some of that confidence stems from the company's efforts to strengthen and position its entertainment business, Nomura analyst Yu Okazaki said in a note.

"We think growth opportunities around imaging technology are abundant in the electronics business. We also take a favorable view of the business platform strategy of supporting investment in growth fields with stable cash flows from consumer hardware," Okazaki added.