3 things smart investors should know about Sony before it does its 5-for-1 stock split

Last month, the Japanese conglomerate Sony Group (NYSE:SONY) has announced a 5-for-1 stock split. While stocks from stock splits can offer interesting investment prospects, there are some important details that smart investors may want to know before purchasing shares of the company.

I’ll examine how Sony’s business is performing and take a look at the long-term trend for investors. Although shares are down 15% so far in 2024, the company’s stock split could come at just the right time – and now could be a lucrative opportunity to start building a position.

1. Sony’s business: what works and what doesn’t

From the PlayStation game console to high-end consumer electronics devices such as televisions and cameras, as well as entertainment content in the form of films and streaming shows, Sony is present practically everywhere.

Although the company has a broad range of businesses, it faces intense competition in its key product lines. Nevertheless, Sony reported record revenue of around 13 trillion yen ($82 billion) for its 2023 fiscal year (ended March 31).

Even better, Sony’s revenue increased across all of its reportable segments except for entertainment, technology and services, where revenue was flat year-over-year. On the surface, that looks like encouraging business.

However, there are a few low points that investors should note – namely, that Sony’s revenue growth in fiscal 2023 came at the expense of rising profitability. For the fiscal year ended March 31, Sony’s net profit was 970 billion yen ($6 billion), a 3% decline from the previous year.

According to company filings, Sony’s imaging and sensor solutions business and financial services business were the main reasons for the decline in profits. Operating profit in the financial services business fell 45 percent year-on-year.

On a positive note, management has taken into account the importance of Sony’s financial services business to the overall company. The company is currently planning a partial divestment of the financial services business.

Although the restructuring is not expected to be completed until October 2025, long-term investors should keep in mind that if a spin-off occurs, Sony will be better positioned to focus on its core growth drivers and more profitable businesses.

2. How has Sony stock performed since the last share split?

More than 20 years have passed since Sony’s last stock split.

According to the chart above, Sony stock has fallen about 13% since the last company split in May 2000. I suspect there is a fair amount of frustration among investors who have held Sony stock during that time.

The story goes on

The company’s long-term performance since the last split hasn’t left much to be desired, and it’s in the midst of some complex restructuring initiatives that are weighing on earnings, so there’s a potential catalyst on the horizon that could be just what Sony needs to take its business to the next level.

3. The secret opportunity that is hidden right before our eyes

Artificial intelligence (AI) is the big topic in the technology world right now. While Sony may not be the first name that comes to mind when you think of AI, there are actually many ways to benefit from this technology.

AI is used in many areas, such as games, cameras and image processing. Sony is active in all of these areas with its consumer electronics businesses.

Furthermore, I speculate that AI will also make its way into the entertainment industry through the possibilities of virtual and augmented reality. I see all of these use cases as a sign of things to come for Sony in the long run.

I think Sony shares have come under a little too much pressure. Overall, the company is in a strong position in its key business areas and earnings are only declining due to one business area that will ultimately be divested.

While the short-term gains might be cloudy due to the ongoing spin-off efforts, the long-term potential should not be overlooked. Sony should be financially stronger after spinning off the financial services sector. As AI continues to penetrate the tech world, I wouldn’t be surprised to see the company emerge as a hidden gem that capitalizes on the technology.

I think now is an interesting time to buy Sony shares while closely monitoring the company’s progress.

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Adam Spatacco does not own any stocks mentioned. The Motley Fool does not own any stocks mentioned. The Motley Fool has a disclosure policy.

Stock Split Alert: 3 Things Smart Investors Should Know About Sony Before Its 5-For-1 Stock Split was originally published by The Motley Fool.