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Stock Analyst Update

PlayStation 2 Woes Still Dragging Down Sony

Profits are down 23%, and video game unit still hasn't bottomed out.

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What Happened?
Electronics and entertainment conglomerate Sony (SNE) announced Thursday that its earnings for the December quarter were down 23% from a year ago, mainly because of poor performance in its video game unit. Continued production delays in the hotly anticipated PlayStation 2 led Sony's game division to post a significant loss on declining sales. The company halved its earnings projections for the current fiscal year ending in March, and said that performance in its electronics division--its best performer over the past three months--would be significantly weaker next quarter.

What It Means for Investors
Although many of Sony's current problems are temporary, we continue to think that its stock is too expensive. The company has been hobbled over the past year by weakness in the video game segment, once its most profitable division. Customers stopped buying the original PlayStation in early 2000 because they were waiting for PlayStation 2, but chip shortages and other snafus resulted in delays in manufacturing the new model. Sony admitted Thursday that it's still facing shortages of some key components, and reduced by 10% the number of units it expects to ship by the end of March. Officials said that they don't expect the video game division to bottom out until next quarter.

These delays are especially worrisome because PlayStation 2 is the centerpiece of Sony's plans to provide both hardware and content for a multimedia Internet-based entertainment center. Rival Sega recently announced that it's discontinuing its Dreamcast game console, and Microsoft's (MSFT) Xbox won't be out until fall; if Sony doesn't get on the ball, it will lose a lot of potential customers for PlayStation 2. Even if it does manage to increase PlayStation 2 production, the specter of a concomitant slowdown in electronics, which still accounts for two thirds of Sony's revenue, does not bode well for the coming year. Overall, we think Sony's prospects are still too speculative to justify its valuation of 50 times earnings.

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David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.