Merrill Predicts Sony to Lose 6 Billion + over 5 Years

[Ben-Nice]

http://ce.seekingalpha.com/article/20369

Steven Towns submits: Merrill Lynch (MER), perhaps the biggest Sony (SNE) hater, downward revised its financial forecast and cut its target share price today. ML also estimated a multi-billion dollar 5-year total operating loss related to the PlayStation 3.

FISCO news service of Japan reported on the ML analyst report. Details of the downward revised financials were not provided.

Target share price revision: ¥4,700 --> ¥4,000 ($40.05 --> $34.09 at ¥117.35/US$1)

Total PS3 operating loss expected over 5 years: ¥738.9 billion ($6.3 billion at ¥117.35/US$1)

The PS3 goes on sale in Japan tomorrow, but there will be extremely tight supplies. A quick sellout will likely make headlines, but doesn't mean much since there will reportedly be only 80,000 units for sale, after a recent 20% cut from 100,000 units. The PS2 sold nearly 1 million units in Japan in the three days following its launch in 2000.

The PS3 launches in the U.S. on the 17th with an available supply of around 400,000 units, although stores have reportedly sold-out of pre-orders.

 

[avaya]

Just so no one gets overly emotional to one degree or the other here there is huge disparity between the banks. Prediciting growth rates at this point is unsure for Sony especially for a time period of 5 years. It's normally uncertain anyway but the degree of variability is certainly much higher than usual.

As an example I have a Credit-Suisse report from the 31st October:

IT'S ALL ABOUT PS3 NOW

• We have reviewed our earnings forecasts for Sony following its Q2 result, leaving our EPS estimates unchanged. There are some changes in composition – the most notable being the reduced expectations for associate Sony BMG on restructuring charges, offset by the strong performance of Sony Ericsson.
  
• Our forecasts are ahead of company guidance with our OP estimate of Â¥144bn ahead of guidance at Â¥50bn. One of the key factors supporting our estimates is the electronics division, and trends going into the seasonally critical Q3 are encouraging. Sony raised its December quarter US sales expectations from high single to low double-digit growth and we understand that order volumes from retailers to consumer electronics companies are strong. While there is undoubtedly downward pressure on pricing, we believe this can be offset by cost reduction.
  
• Q3 seasonality should be intensified by the strong performance we are forecasting from Pictures on the back of Da Vinci Code and other DVD sales.
  
• The launch of PlayStation 3 (PS3) takes place over the next few weeks in Japan and the US and we believe that PS3 shipments are broadly in line with guidance. If PS3 delays again, we believe it will not affect earnings in FY3/07, but rather earnings growth in FY3/08. We estimate PS3 shipments of 12mn FY3/08; to achieve this, monthly production will need to exceed 1mn by January 2007.
  
• We maintain our OUTPERFORM rating and target price of Â¥7,500/$64.00.

Download Report Here: http://download.yousendit.com/61AC2625387B9952

JPMorgan 日本 Equity Research Team 27th October

Outlook for games segment unchanged: As before, management looks for the games segment as a whole to report an operating loss of roughly ¥200 billion in FY2006 before moving back into the black in FY2007.

However, management added the caveat that changes in its basic business model would be needed to put the segment back in the black, including not only a reduction in chip costs (through the use of finer design rules) but also a greater emphasis on generating revenues outside of games, such as through Internet-based services. Thus, we get the impression that it may be too early to count on a quick turnaround at Sony’s games segment.

Download Report Here: http://download.yousendit.com/218C505E4F65B2CC

 

[nonamer]

That has to be one of the worse predictions ever. How would it even be possible? Sony owns the right to most of the chips as well as internally makes the most expensive part, the Bluray drive. We simply cannot have a Xbox1 loss fiasco repeat here unless the PS3 is cut to $200 tommorrow.

 

[Bobbler]

Sony would have to be doing something incredibly wrong with the PS3 to be losing that much.

The first year they are slated to lose like 1.6bln from it? To reach 6.3bln in 5 years they'd have to continue on at near this rate -- are they assuming no cost reductions and no offset by game/peripheral sales over time?

I have to agree with 'nonamer', I don't see how this be realistically possible. I've been wrong before, but this looks absurd from where I'm sitting.

 

[Shifty Geezer]

I'd love to see how they work out that Sony are going to lose $6 billion, more than XB, when XB had terrible hardware deals, and with PS3 supporting far more revenue generating options. If the PS3 console loses $100 per machine for all it's life, that'd need 60 million PS3s to be sold without any of the machines making money elsewhere. It doesn't add up. Or are Sony going to spend $6 billion + $PS3's software profits on the online network?

 

[avaya]

From the reports I posted both JP Morgan and Credit Suisse expect SCEI to be in the black for Fiscal 2008.

 

[mrboo]

Did'nt he also predict the $1000 launch price aswel ?

His words meen nothing to me

 

[Phil]

Here's my vote to cast a ban on anything Merrill Lynch related here at B3d. Their predictions are nothing but rubbish and wasted bandwidth. Even worse; they stir up the forum over basically nothing.

 

[Magnum PI]

when you know how many were recommending enron near its collapse, you don't want to rely on advices from these guys.

 

[London Geezer]

These people still have their jobs??

I mean, Sony would have to give millions of PS3s and games for FREE to get those kind of losses.

 

[pascal]

FREE PS3 ?

WHERE, WHERE

 

[RancidLunchmeat]

Well, ML and Morgan both agree that Sony will be in the red big time in 2006. ML sees that loss continue for another 4 years, where Morgan expects Sony to be in the black if they make significant changes in their current business model.

The CS prediction speaks more of Sony as a whole, and not just their games division.

For what its worth, ML and CS are two of the most accurate firms when it comes to predicting stock prices.

It's also interesting to note that the JP Morgan report is a report of what Sony management is telling them, rather than their own analysis.

 

[nonamer]

Well, ML and Morgan both agree that Sony will be in the red big time in 2006. ML sees that loss continue for another 4 years, where Morgan expects Sony to be in the black if they make significant changes in their current business model.

Except that it would be mind boggling how the initial strategy will continue for another 4 years. The only time that ever did this was MS with Xbox1, and that's because they screwed themselves with bad contracts. A company with good contracts or makes the parts themselves will absolutely see a very low manufacturing cost by then. And the change in business model is nothing more than making cheaper chips and money from sources other than games. They gave a suggestion, but it probably already exists in the form of Bluray royalties and downloadable content.

The CS prediction speaks more of Sony as a whole, and not just their games division.

For what its worth, ML and CS are two of the most accurate firms when it comes to predicting stock prices.

It's also interesting to note that the JP Morgan report is a report of what Sony management is telling them, rather than their own analysis.

No offense but these are appeals to authority and ad hominems. Just to point out some logical fallacies.

 

[Shifty Geezer]

Well, ML and Morgan both agree that Sony will be in the red big time in 2006. ML sees that loss continue for another 4 years, where Morgan expects Sony to be in the black if they make significant changes in their current business model.

Is there any plausible argument at all that anyone can think of which would lead Sony to lose $6 billion? I can't see any sense to that statement. I don't know where they can begin. I imagine if PS3 was to sell like hot-cakes and no-one bought any games, either disc games or downloads, they'd still not lose $6 billion! Unless they're going to start paying people to use PS3... How else can they lose $1 billion+ a year for 4 years, unless the cost of the hardware doesn't come down? Would ML really take the current loses per hardware and say 'if that doesn't change over the next 4 years, Sony will lose 6 billion'?

What is it about the business model that's going to lead Sony to $6 billion loss if they don't change, that isn't a certainty will change?

 

[Bobbler]

Is there any plausible argument at all that anyone can think of which would lead Sony to lose $6 billion? I can't see any sense to that statement. I don't know where they can begin. I imagine if PS3 was to sell like hot-cakes and no-one bought any games, either disc games or downloads, they'd still not lose $6 billion! Unless they're going to start paying people to use PS3... How else can they lose $1 billion+ a year for 4 years, unless the cost of the hardware doesn't come down? Would ML really take the current loses per hardware and say 'if that doesn't change over the next 4 years, Sony will lose 6 billion'?

What is it about the business model that's going to lead Sony to $6 billion loss if they don't change, that isn't a certainty will change?

That's exactly what I had issue with. I don't see any realistic/plausible way for it to happen. Sure there are some ill-contrived cases a person could come up with, but they don't seem realistic to expect. Even if game sales were poor compared to PS2, and sales were high -- you'd still have the standard cost reductions which are going to happen (at least, a logical person would expect them), meaning losing 6bln would still be hard to do. Blue laser diodes should come down in cost and improve in yields quite drastically (a lot of companies are banking on assumption that they will, not just Sony -- HD-DVD forum and Blu-ray consortium both need it to happen), Cell and RSX have no reason to stay expensive either. Cutting out PS2 hardware B/C and replacing it with software sometime next year should shave off some 20-30 dollars too. There's lots of standard cost cuts which are expected to happen and there isn't any logical reason I can think of to expect otherwise.

Things would have to go seriously wrong in a lot of ways for it to happen. I don't see how they can predict that with any sort of evidence to back it up.

This isn't even about ML being typically a producer of negative Sony news, at this point I'm just completely at a loss for how ML got those numbers -- typically they've had some sort of evidence to back up their claims, but this doesn't seem to provide any, nor any reasons at all for the assumptions.

 

[gordon]

Maybe their numbers include developmental costs to date, which are presumably very high.

 

[RancidLunchmeat]

No offense but these are appeals to authority and ad hominems. Just to point out some logical fallacies.

Logical fallacies? What are you talking about? For starters the only ad hominems in this thread are being used by people who are automatically discounting the results of ML's study based upon the fact that they are ML.

Second, I never stated that ML's rating as one of the best in predicting stock prices provided any support for THIS prediction of stock price. In fact, I went so far as to mention that ML & CS were BOTH considered to be top ranked in this regard, and they have both reached entirely different conclusions on Sony's stock price. Appeals to authority would only be valid if I were using it as evidence to support an argument, which I clearly wasn't.

Third, there is no logical discussion going on here because nobody has the criteria that ML or CS used to make their assessments, and nobody has even READ their assessments, we've only read reports of what their reports have supposedly said.

 

[pc999]

Is unless the cost of the hardware doesn't come down? Would ML really take the current loses per hardware and say 'if that doesn't change over the next 4 years, Sony will lose 6 billion'?

Well cost will go down but prices must go too, eg if the cost go down 100-200 the price will probably go down 100-200$ too and till they hit the 200$ mark there is a big road, then the lower the price more people will buy it and once that the later adopters people are they will probably buy less games so there is a long way till they can do what they did last gen.

With this I dont mean he is correct but certainly I can see the possibility of this happening, althought I dont think it is that probable but it is possible.

 

[dobwal]

Except that it would be mind boggling how the initial strategy will continue for another 4 years. The only time that ever did this was MS with Xbox1, and that's because they screwed themselves with bad contracts. A company with good contracts or makes the parts themselves will absolutely see a very low manufacturing cost by then. And the change in business model is nothing more than make cheaper chips and money other than games, which they gave a suggestion, but it probably already exists in the form of Bluray royalties and downloadable content.

No offense but these are appeals to authority and ad hominems. Just to point out some logical fallacies.

Even with good contracts, no outsource manufacturer is going to eat alot of cost due to low volumes just because your actual sales and projected sales don't match up. If Sony loses major marketshare to 360/Wii, then there is little they can do to offset the lost revenue.

Whether a contract is good or not is relative, to the situation at hand. I doubt the contracts signed by Sony will allow the PS3 to be profitable at Xbox volumes at Xbox price points. MS contracts weren't bad per se (Nvidia probably considered them "good" contracts), what was bad was MS inability to properly predict the sale of their consoles. Plus, the MS/Nvidia lawsuit revolved around a 13 million dollar discount (hardly a dent on 4 billion). If Xbox had met projected sales at the projected price points then no one would have questioned those contracts.

 

[avaya]

No one should dismiss or accept the ML report till you can actually read it.

There is some bias in the reports, the disclosures and disclaimers in them state the possible existence of it, but for the most part analyst reports are a good indicator. Generally if you take a couple of them together you can usually derive a pretty balanced view of what to expect for a company which in most cases will tend to be quite accurate.

Sony right now is in a turbulent stage so the disparity between analyst expectations is exacerbated.