Sony Wisely Rejects Third Point’s Plan for Its Semiconductor Business

The Japanese conglomerate will keep making image sensors for smartphones.

| More on:

Back in June, activist investor Dan Loeb’s Third Point fund management company disclosed that it had accumulated a $1.5 billion stake in Sony (NYSE: SNE). Loeb pushed for a spin-off of Sony’s semiconductor business and the divestment of non-core assets — including its financial arm and its stakes in Olympus (OTC: OCPNY) and Spotify — to fund the expansion of its film and gaming units.

Third Point’s stake only accounts for about 2% of Sony’s enterprise value, but Sony still reviewed its non-core assets and decided to sell its stake in Olympus last month. However, Sony subsequently shot down Third Point’s other proposals.

Sony stated that it would “proactively evaluate” its business portfolio, but that it would retain its financial unit and semiconductor business, the latter of which CEO Kenichiro Yoshida called a “vital element” of Sony’s future in a recent Financial Times interview. I previously stated that Sony should keep its semiconductor business, so I think it made the right call by rejecting Third Point’s proposal.

Why Sony should keep its semiconductor unit

Sony’s semiconductors unit, which is now called the imaging and sensing solutions (I&SS) unit, mainly produces image sensors for cameras. It supplies image sensors for roughly half the smartphone market, and its top customers include Apple, Samsung, and Huawei.

Sony’s position as the world’s top image sensor maker enables it to profit from the growth of the smartphone market without owning a top smartphone brand. Its own smartphone brand, Xperia, accounts for less than 1% of the global market.

The I&SS unit’s revenue rose 14% annually last quarter and accounted for 12% of Sony’s top line. Its operating income surged 70% and accounted for 21% of Sony’s operating profits.

That growth might seem surprising, since smartphone shipments fell 4% in 2018, according to IDC, and are expected to dip another 2% this year. However, Sony’s image sensor shipments are climbing because smartphone makers are installing more cameras per device (like the triple-camera iPhone 11 Pro) to attract more buyers.

Apple CEO Tim Cook stands in front of a picture of an iPhone 11 Pro.

Image source: Apple.

The I&SS business is also expanding beyond mobile devices and into Internet of Things (IoT) devices and AI-powered cameras for enterprise customers. That’s why Sony started developing enterprise-oriented image sensors with Microsoft earlier this year.

Sony expects its I&SS sales to rise 13% in fiscal 2019 (which ends next March) as it sells more image sensors for mobile devices and improves its product mix. It expects the unit’s operating profit to remain roughly flat. Simply put, Sony’s I&SS unit remains strong, and it would be foolish to sell it or spin it off to generate some quick cash.

Why investors shouldn’t take Third Point too seriously

Third Point’s track record with Sony should also raise eyebrows. Back in 2013, the hedge fund acquired a 7% stake in Sony and tried to convince it to divest its movie business. Sony refused, Third Point sold its entire stake, and the stock more than tripled afterward on the strength of its gaming business.

Loeb is now turning his prior thesis upside down and championing the expansion of Sony’s movie business — which faces tough competition from heavyweights like Disney (NYSE: DIS) — and dumping its dependable semiconductor unit. The suggestion is silly, and investors who simply stuck with Sony over the past five years after Loeb sold his shares would have easily outperformed his hedge fund’s gains.

Sony should invest more cash into its movie business after its divorce with Disney, and it should focus on the launch of the PS5 next year — but it already has plenty of cash to do so. It ended last quarter with 604 billion yen ($5.6 billion) in cash and equivalents.

If Sony needs more cash, it should dump its unprofitable mobile unit instead. That business, which Sony quietly merged with its other consumer electronics earlier this year, is a money pit that repeatedly offsets the growth of its healthier units.

The key takeaways

Sony still has plenty of catalysts on the horizon. Its gaming unit should recover next year after it launches the PS5, its movie unit should stabilize if it wisely capitalizes on the Spider-Man series’ stand-alone momentum, its music business remains strong, and it should sell more image sensors for multi-camera devices.

Investors should ignore Third Point’s suggestions, since the fund has been consistently wrong about Sony in the past, and simply focus on those long-term tailwinds.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Apple and Walt Disney. The Motley Fool owns shares of and recommends Apple, Microsoft, Spotify Technology, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, and long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

More on Tech Stocks

Digital background depicting innovative technologies in (AI) artificial systems, neural interfaces and internet machine learning technologies
Tech Stocks

1 Bright Canadian AI Stock Ready to Surge in 2025 and Beyond

Don't run away from tech stocks, this AI stock could surge this year and beyond.

Read more »

A microchip in a circuit board powers artificial intelligence.
Tech Stocks

An AI Giant Hiding in Plain Sight: Why Wall Street Is Missing Shopify’s Tech Edge

Shopify (TSX:SHOP) stock is a top Canadian AI play that could break out to new highs in 2025.

Read more »

Abstract Human Skull representing AI
Tech Stocks

Step Aside, Nvidia: This AI Stock Is the Real Deal for Canadian Investors

Canada has several tech companies pivoting to AI, which isn't the same as pure-breed AI stocks, but that's not necessarily…

Read more »

A shopper makes purchases from an online store.
Tech Stocks

Prediction: Here’s Where Shopify Will Land at Year-End

For long-term growth investors, Shopify (TSX:SHOP) has been a winner worth owning. Will that continue moving forward?

Read more »

space ship model takes off
Tech Stocks

1 TSX Powerhouse Ready for Takeoff

Constellation Software (TSX:CSU) is a top tech play that could still surge amid looming tariffs.

Read more »

Sharing secrets
Tech Stocks

Want to Invest in Quantum Computing? 1 Stock That Is a Great Buy Right Now.

The quantum hype might not be all it seems. See why you should pay closer attention to surprisingly familiar names…

Read more »

Digital background depicting innovative technologies in (AI) artificial systems, neural interfaces and internet machine learning technologies
Tech Stocks

2 Cheap-Looking Stocks to Could Win in the AI Revolution

It's about time we gave firms like Thomson Reuters (TSX:TRI) a bit more of an AI premium.

Read more »

bulb idea thinking
Tech Stocks

The Smartest Canadian Stock to Buy With $1,000 Right Now

Strong financials, booming demand for its services, and an expanding presence in AI and cloud computing hardware make Celestica the…

Read more »