The entertainment industry has been under pressure as a result of macroeconomic uncertainties. So, I think it could be wise to wait for a better entry point in Sony Group Corporation (SONY) and Tencent Music Entertainment Group (TME) for reasons discussed throughout this article. However, considering the weak fundamentals of The Walt Disney Company (DIS), it could be best avoided.
The media industry is in turmoil and is unlikely to change anytime soon. Media companies are dealing with two Hollywood strikes, declining ad revenue, and losing money on streaming businesses.
In addition, since last year, macroeconomic challenges have resulted in an increase in production costs, a decrease in ad income, and the loss of hundreds of billions of dollars in value from entertainment and media companies.
However, the entertainment industry is adapting in response to shifting customer demands. Despite macroeconomic concerns, the sector’s growth prospects are promising, owing mostly to the widespread use of digital technologies and increased demand for digital entertainment.
According to Statista, total revenue in the entertainment market is expected to grow at a 10.5% CAGR to $48.76 billion by 2027.
Let us look deeper into the fundamentals of the featured stocks.
Stocks to Hold:
Sony Group Corporation (SONY)
Headquartered in Tokyo, Japan, SONY designs, develops, produces, and sells electronic equipment, instruments, and devices for the consumer, professional, and industrial markets in Japan, the United States, Europe, China, the Asia-Pacific, and internationally.
SONY’s forward EV/Sales multiple of 1.63 is 36.4% higher than the industry average of 1.19 while its forward EV/EBITDA multiple of 9.43 is 4% lower than the industry average of 9.82.
SONY’s trailing-12-month gross profit margin of 27.25% is 22.7% lower than the 35.25% industry average, while its trailing-12-month net income margin of 8.12% is 93.9% higher than the 4.19% industry average.
SONY’s total sales and financial services revenue increased 29.5% year-over-year to ¥3.06 trillion ($21.82 billion) in the fiscal fourth quarter that ended March 31, 2023.
Its net income per share attributable to SONY’s stockholders increased 16.4% year-over-year to ¥103.53. Also, its total costs and expenses increased 38.1% year-over-year to ¥ 2.94 trillion ($20.95 billion).
SONY’s revenue is expected to increase marginally year-over-year to $17.66 billion for the fiscal first quarter ending June 2023, while its EPS is expected to decline 30.3% year-over-year to $0.92 in the same quarter.
The stock has gained 43.8% over the past nine months to close the last trading session at $93.66.
SONY’s POWR Ratings reflect uncertainty. The stock has an overall rating of C, equating to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
SONY also has a C grade for Value, Stability, and Quality. It is ranked #4 out of 13 stocks in the Entertainment - Media Producers industry. Click here for the additional POWR Ratings for Sentiment, Momentum, and Growth for SONY.
Tencent Music Entertainment Group (TME)
Based in Shenzhen, China, TME operates online music entertainment platforms to provide music streaming, online karaoke, and live streaming services in the People’s Republic of China.
TME’s forward EV/Sales multiple of 2.31 is 26.8% higher than the industry average of 1.82, while its forward EV/EBIT multiple of 11.87 is 24.8% lower than the industry average of 15.78.
TME’s trailing-12-month CAPEX/ Sales of 0.30% is 92.6% lower than the 4.02% industry average, while its trailing-12-month net income margin of 14.69% is 400.5% higher than the 2.94% industry average.
During the fiscal first quarter ended March 31, 2023, TME’s revenues increased 5.4% year-over-year to RMB7 billion ($1.02 billion). Also, its non-IRFS net profit rose 55.8% year-over-year to RMB1.46 billion ($213 million).
Its non-IRFS earnings per share for Class A and Class B ordinary shares came in at RMB0.45, representing an increase of 66.7% year-over-year.
However, its current assets came in at RMB25.85 billion ($3.62 billion) for the period that ended March 31, 2023, compared to RMB26.56 billion ($3.72 billion) for the period that ended December 31, 2022.
Street expects TME’s revenue to increase marginally year-over-year to $4.13 billion for the year ending December 2023. Its EPS is expected to grow 26.5% year-over-year to $0.54 for the same period. It surpassed EPS estimates in three of four trailing quarters. The stock has gained 19.6% over the past six months to close the last trading session at $6.88.
TME’s has an overall C rating, equating to a Neutral in our POWR Ratings system.
It also has a C grade for Growth, Stability, Sentiment, and Quality. It is ranked #3 in the same industry. Beyond what is stated above, we’ve also rated TME for Value and Momentum. Get all TME ratings here.
Stock to Avoid:
The Walt Disney Company (DIS)
DIS operates as an entertainment company worldwide. It operates through two segments, Disney Media and Entertainment Distribution; and Disney Parks, Experiences, and Products.
DIS’ forward EV/Sales multiple of 2.34 is 28.1% higher than the industry average of 1.82. Its forward Price/Sales multiple of 1.77 is 50.9% higher than the industry average of 1.17.
DIS’ trailing-12-month gross profit margin of 33.04% is 33.4% lower than the industry average of 49.59%, while its trailing-12-month asset turnover ratio of 0.43x is 13.4% lower than the industry average of 0.49x.
For the second quarter that ended April 1, 2023, DIS’ costs and expenses increased 10.7% year-over-year to $19.54 billion. The company’s after-tax income, excluding certain items, declined 9% year-over-year to $1.92 billion, and its EPS, excluding certain items, came in at $0.93, down 13.9% year-over-year.
Over the past six months, the stock has lost 18.3% to close the last trading session at $86.60.
DIS’ has an overall D rating, equating to a Sell in our POWR Ratings system.
It also has a D grade for Momentum. It is ranked #9 in the same industry. To see additional DIS ratings for Value, Quality, Sentiment, Stability, and Growth, click here.
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SONY shares were trading at $93.04 per share on Tuesday morning, down $0.62 (-0.66%). Year-to-date, SONY has gained 22.27%, versus a 19.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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