Is Sony stock a pre-split buy?

Stock splits have suddenly become the rage this year. The electronics giant The Sony Group (SONY -0.16%) has thrown his hat into this ring by joining companies such as Nvidia and Chipotle.

Sony has announced a 5-for-1 stock split that will take effect on October 1st. While this move lowers the price of individual stocks, making them affordable for more investors, it doesn’t necessarily mean Sony stock is a buy.

Also, determining whether to invest in Sony involves an additional wrinkle. The company plans to execute a partial spin-off of its financial services business, known as Sony Financial Group (SFG). Let’s look at Sony to help you sort through all of this and decide if the stock is worth buying before the stock split.

Where is Sony today?

Sony started as an electronics company, but today it focuses on entertainment. In fiscal 2023, which ended March 31, 2024, the company’s music, film and video game divisions accounted for about 60% of its sales.

This concentration of revenue plays an important role in its corporate strategy. Today’s Sony views its entertainment divisions as a source of future revenue growth. The firm calls this strategy “kando,” the Japanese word for “feeling,” because its goal is to trigger an emotional connection with customers through its offerings.

The kando approach works. For example, the latest generation of its gaming console, the PlayStation 5, is its most profitable to date. It produced $10 billion in operating income in the four years since its launch in 2020. For comparison, the previous PlayStation 4 took seven years to reach $9 billion in operating income.

Although Sony focuses on its entertainment business, it does not try to compete with them Netflix or other major streaming services. Instead of taking on the cost of building the streaming infrastructure, Sony opted to sell its movie content. It claims to be the largest independent content provider in the film industry.

With the streaming wars out of the way, Sony acquired Alamo Drafthouse Cinema in June. The acquisition means Sony owns a cinema chain, the first time a major studio has done so in 75 years.

Sony is also leveraging its technological expertise to improve its entertainment offerings. For example, the company has applied its video game software to filmmaking, using it to project backgrounds on giant screens alongside actors during filming. This allows filmmakers to make real-time adjustments, such as changing camera angles, which reduces the need for expensive reshoots.

The wrinkles for investors in Sony’s stock split plans

The only area of ​​the conglomerate’s operations that doesn’t fit its entertainment focus is Sony Financial Group. It is a different type of business from the rest of the organization, focused on banking, life insurance and other finance-related offerings. That’s why separating SFG makes sense, giving it the independence it needs to build its business.

The company’s funding looks better even without SFG. Sony’s sales in the first quarter of fiscal 2024, which ended June 30, rose 12 percent year-on-year to 2.6 trillion yen ($18 billion), and operating income rose 25 percent to to ¥249.1 billion ($1.75 billion), excluding the SFG division. But with the SFG segment, Sony’s revenue grew by just 2% and operating income grew by 10% year-on-year.

The SFG spin-off is scheduled for October 2025 and involves swapping some Sony shares for some in the new company. So deciding to buy Sony stock as a long-term investment before the stock split means evaluating whether you want to own stock in the financial services spin-off.

One benefit of owning the spin-off stock is as a source of passive income, as the new company will pay dividends. We’ve dug into the pros and cons of owning SFG stock in this article to help you with your decision.

To buy or not to buy Sony stock

While Sony shares are not far off their 52-week high of $100.88, the stock’s valuation looks attractive compared to entertainment competitors like Netflix and Disney. Looking at the price-to-earnings (P/E) ratio, a widely used measure to gauge stock valuation, for each of these companies, Sony stock looks undervalued.

Data by YCharts.

Another aspect is what Wall Street thinks. The current consensus among Wall Street analysts is a “buy” rating with a median stock price target of $111.16 for Sony stock.

Considering these elements, along with its differentiated kando strategy, Sony looks like a compelling long-term investment. That said, owning shares in its financial services spin-off is another matter. Some details about the spin-off company have not yet been announced, such as the frequency of dividend payments.

Since the stock split does not change the market value of the stock and Sony’s stock price is not far from the highest, there is no rush to buy before the stock split. Instead, wait for more details about the spin-off to make an informed decision. In the meantime, it’s best to put Sony on a list of investment opportunities to watch.