PlayStation, Bond Buoy Sony

The entertainment company stands to win big with the debut of the game console and <I>Casino Royale</I>.
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The frenzy around

Sony's

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PlayStation 3, its latest game console, could turn the tide for the beleaguered entertainment giant

Sony sold out its initial supply of PS3 consoles within hours of the system's launch Friday in stores across North America. The successful debut is a much-needed boost for the entertainment company, which has been struggling with criticism around high PS3 costs, inadequate supplies of the much-in-demand consoles and

battery recalls.

Sony's stock has been down nearly 13 % over the last three months.

But now, propelled by the buzz around PS3, Sony could make a comeback. Shares of Sony rose nearly 2.5% to $40.92, up 98 cents. The stock is trading well below its 52-week high of $52.29.

"You see people lined up outside the doors of stores across the country, and that has to count as a positive for Sony, especially since there have been so many complaints about PS3," says James McGlynn, portfolio manager for Summit Everest Fund, which holds shares of Sony.

Sony may also get another unexpected boost today. The latest James Bond movie,

Casino Royale

, opened to good reviews, and that could help Sony Pictures, which is releasing the movie.

Though Sony will split its winnings with

Metro-Goldwyn-Mayer

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, which financed 25% of the movie, Sony's profit is expected to be huge. Sony is part of a consortium that bought MGM for $4.85 billion in 2004, with Sony investing in $300 million, and private-equity funds kicking in the rest

"The box-office receipts and the PS3 sales should help boost sentiment," says McGlynn, who believes that Sony shares are undervalued compared with other media stocks.

The blowout sales of PS3 could take the edge off the bad news around the console's pricing. Though Sony has been facing criticism over the high price tag, research firm iSuppli believes that the console may still be a bargain.

A Losing Proposition?

iSuppli estimates that the combined materials and manufacturing cost of the PS3 is roughly $806 for the model equipped with a 20GB hard-disk drive, and $840 for the 60GB version. This total doesn't include additional costs for elements such as the controller, cables and packaging, the firm says.

At these costs, Sony is taking a considerable loss on each PS3 sold, says iSuppli. Sony retails the 20GB model for $499 and the 60GB version for $599.

But customers seem to be willing to pay the price for a PS3, though it is more expensive than rival consoles, says McGlynn. "PS3 is expensive, but if gamers think it is worth the price, it can be a positive for Sony in the long term."

On online marketplace

eBay

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, demand for PS3s remains high. On Friday morning, about 175 PS3 consoles sold for an average of $2,618 each.

Additionally, about 3,530 PS3s have been traded in presales to date for an average price of $1,789, estimates eBay Marketplace Research, an independent subscription-based firm that tracks eBay listings and sales trends.

Some of this demand could be artificial because Sony has been shipping lower-than-expected units of the PS3. Sony has said it will deliver 400,000 units in North America for the launch, but analysts have raised doubts about those numbers.

Lazard Capital Markets analyst Colin Sebastian said recently in a research note that just about 150,000 to 2000,000 units may be ultimately available for the launch. Sony, which has been extremely tight-lipped on the issue, did not respond to requests for a comment.

Until a clearer picture about the PS3 supply emerges, investors need to watch out, says Evan Williams, an analyst with Pacific Crest Equities, which does not have a banking relationship with Sony.

"There's not much that has been unanticipated about today's PS3 launch," he says "Clearly demand is outstripping supply, but we won't get a true sense of the demand until Sony releases enough units."

Williams says that despite the seeming success of PS3 on Friday, Sony still has a long way to go. The company needs to ramp up production to deliver enough consoles to satisfy demand in the holiday season.

The entertainment giant also needs to fend off rivals in the $20 billion console market such as

Nintendo

, which releases its Wii system on Nov. 19, and

Microsoft's

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Xbox 360, which launched this time last year.

"I think Sony is fairly valued based on the backdrop of information about the PS3 and our expectations of the business for the holiday season," he says. "There are perception issues that the company needs to fix, and the stock price may struggle for a while."