Case Study - Sony Vs Google

Case study: Sony vs Google
July 2014
Several students requested me to write an analysis of real companies using the strategy taught in the
Value Investing Bootcamp video course, and I am here to serve. I chose two big, well-known
companies, Sony and Google, to show you how these behemoths differ and how this is reflected in
the performance of their respective stocks prices. In other words, this document will present an
example of a true value stock, as well as a stock you better stay far away from and how to identify
such companies for what they really are. Here we go!
Sony (SNE)
Many of you probably grew up with a PlayStation under their TV set, or maybe you've spend some of
your youth playing it from your friend's couch. I did the latter and used to get so caught up in the
experience that I pulled the entire console out of its cabinet one time. And producing PlayStations
and other electronic gizmos is just one of the many activities Sony is engaged in. The company also
runs Sony Music Entertainment, one of the largest music publishers in the world, and Sony Pictures
produces blockbuster movies, like American Hustle and Captain Phillips. Sony even has an insurance
branch called Sony Life Insurance. How's that for diversification?
Let's see how all this translates into cold, hard financial figures.
Return on Equity Debt/Equity Net Margin (%) Book Value/Share

2014 6.2 0.9 -0.9 21.0
2013 4.1 0.8 0.6 23.0
2012 3.8 1.0 -7.0 24.5
2011 10.8 0.7 -3.6 30.5
2010 -3.1 0.7 -0.6 31.8
2009 -1.4 0.6 -1.3 26.7
2008 -9.4 0.6 4.2 29.8
2007 -20.0 0.7 1.5 28.6
2006 2.0 0.6 1.7 27.2
2005 -3.1 0.6 2.3 26.9
Ouch.. that doesn't look too pretty. We see a consistently low Return on Equity, a high and increasing
Debt/Equity ratio, a Net Margin which fluctuates between losses and unimpressive profits, and finally
a declining Book Value per share over time.
Besides the above mentioned ratios, the Current Ratio of Sony is merely 0.88, indicating that the
company might have problems paying their short-term obligations, Enterprising Profits come in at
just 0.72%, indicating that the company is not creating any value, and an Altman Z-Score of just 0.59,
indicating that the company has an above-average chance of going bankrupt in the near future.
Sony's Free Cash Flow fluctuates significantly, and has been negative twice in the last 10 years.
The competitive position of Sony is rather complex to assess, since they operate in so many markets.
They have a strong brand name and a loyal following of PlayStation fans. However, the home
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entertainment market is one of fierce competition, and Microsoft and Nintendo are serious forces. In
the music industry Sony has a lot of power, since Sony Music Entertainment is one of the largest
publishers. Nevertheless, the music industry sees its margins shrink day after day, as the internet is
cutting out the middle man. Sony's response to this development has been typical and unproductive:
they openly supported the SOPA and PIPA abominations, and have court cases running against
websites like IsoHunt and other who they believe are infringing their copyrights.
Sony's CEO is Kazuo Hirai (54), who was first head of Sony's video game division. In 2013, Hirai was
one of the 40 Sony executives who decided to forgo bonuses, worth up to 50% of their salary, since
they had been unable to turn a profit. A noble gesture indeed, but still just a drop in the ocean.
Google (GOOGL)
The next company we will put through the wringer is Google, who singlehandedly popularized
placing slides in the office and radically changed several industries forever. Despite the fact that
Google is innovating on many technological fronts, their main source of income is still their ad
revenue. Because the company has this ad cash cow, they are able to offer many amazing products
and services for free, like their highly popular Android mobile operating system and their cloud-
based Google Documents software.
We just looked at Sony's dreadful financial figures, now let's see how Google stacks up.
Return on Equity Debt/Equity Net Margin (%) Book Value/Share

2013 16.2 0.1 21.6 130.1
2012 16.5 0.1 21.4 108.8
2011 18.7 0.1 25.7 89.6
2010 20.7 0.1 29.0 72.0
2009 20.3 0.0 27.6 56.7
2008 16.6 0.0 19.4 44.9
2007 21.2 0.0 25.3 36.3
2006 23.3 0.0 29.0 27.9
2005 23.7 0.0 23.9 16.0
2004 23.0 0.0 12.5 5.4
Different as night and day! Google's Return on Equity, despite a slight decline, is consistently high,
meaning the company is very efficient at using its equity to generate income. Google hardly has any
debt, sports a very healthy Net Margin, and is growing its Book Value at a staggering pace.
In addition to these ratios, Google's Current Ratio is 4.63, indicating that the company has no trouble
at all to pay its short-term obligations. Enterprising Profits are 15.66%, which is not perfect, but much
higher than Sony's 0.72%. Google's Altman Z-Score is a massive 11.89, meaning there is as good as
zero risk of bankruptcy. Free Cash Flow has never been negative for Google in the last ten years, and
has in fact been increasing from 2004 till 2012.
Forbes lists Google as one of the top 5 most powerful brands in the world, assigning a value of $47.3
billion to its name alone. But the Google brand is not the only competitive advantage the company
possesses. Personally, I'm hooked on anything Google and would never switch to Apple products. So
just like Apple, Google has a loyal customer base. Google also managed to kick Internet Explorer off
the internet browser throne, and Android has passed iOS as the most used mobile operating system.
Google is everywhere. They have become a part of almost everyone's daily lives, and my guess is
that, like the ominous title of the bestseller Planet Google suggests, their influence is only going to
extend in the future.
Google is still run by its original founders, Larry Page (41) and Sergey Brin (40). They recently assigned
Eric E. Schmidt (59), who used to be Google's CEO, as their Executive Chairman, while naming Larry
Page the new CEO. Google does not pay a dividend and is not known for buying back shares. In the
case of Google this is a good thing, because management believes that they can create more
shareholder value by investing money into future growth than by paying it out to shareholders
directly.
The verdict
We looked at two companies who both operate in a multitude of different markets. From our
analyses it is clear that Google fits many of Warren Buffett's "wonderful company" criteria, while
Sony clearly does not.
One fundamental assumption made by value investors is that stock prices will eventually reflect the
performance of the underlying company. Since 10 years is a sufficiently long period for this effect to
show itself, let us have a look at the price performance of both companies over the past decade.
Source: finance.google.com
The graph shows exactly what was to be expected. Google (the red line) has performed way better
than Sony (the blue line). During the past decade, Google shares increased in value 10 fold, which is
approximately in line with the development of Google's book value , while Sony shares lost 55% of
their value during the same period thanks to less-than-unimpressive financial results.
Have I been cherry picking here? Absolutely! But if you perform the same analyses for different
companies, I can assure you the results will be largely the same. Value simply wins out in the end.

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Return on Equity Debt/Equity Net Margin (%) Book Value/Share

Return on Equity Debt/Equity Net Margin (%) Book Value/Share

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