Sony (ticker: SNE) Group’s American depository receipts dipped on Tuesday trading after an analyst at Citi Research warned that a recession would limit the potential upside for shares of Japanese consumer electronics giant.
The analyst in question, Kota Ezawa, chopped his Sony rating from Buy to Neutral and lowered his price target for Japan-listed Sony shares to 12000 yen ($88.39) from 18,000 yen in a note on Tuesday. Sony ADRs dropped 0.8% to $80.95 on Tuesday.
According to Ezawa, the company could post solid results for the June quarter, but he doesn’t expect that it will translate to stability for the stock price as investors worry about what comes next.
“Given the strength of earnings and benefits from yen depreciation, if Sony does not disclose an earnings outlook that is sufficiently conservative regarding the potential for deterioration in profits, the share price may not fully factor in the negative scenario and therefore fail to bottom out in the near term,” he says. “Given the possibility of a steady deterioration in earnings, we expect the share price to stagnate over the longer term.”
Sony ADRs have dropped 36% in 2022 so far in the midst of a broader tech slide. Its Play Station 5 videogame consoles have been an outlier. Ezawa notes that the U.S accounts for only 28% of Sony’s sales while Europe stands at 19%- this means that rising interest rates and inflation in the U.S and high energy prices in Europe might impact results. He also predicts a drop-in consumer electronics business related to the Japanese economy and consumption.
According to him, there is a risk that Sony’s Japan-listed shares can drop another 20%, indicating how the stock reacted to declines in 2001, 2008, and 2012.
“We assume that there is a probability of around 50% that the equity market will increasingly factor in a recession,” Ezawa added.