Sony’s Record Climb Makes Investors More Bullish on Gaming Boom

(Bloomberg) -- Sony Group Corp.’s long-awaited rise to record highs has emboldened bullish investors and analysts, who see gains extending into 2025 on a robust outlook for video games.

Shares of the PlayStation maker surged over 50% from an August trough to reach an all-time high last week, more than doubling the gain in the Topix. It was the first new peak for the stock since 2000.

Growth in the company’s gaming business, which now generates over a third of total revenue, is seen boosting shares further next year. Anticipation is high for the upcoming launches of in-house games like Ghost of Yotei and Rockstar Games Inc.’s Grand Theft Auto VI.

As optimism grows, bearish bets on Sony have receded, with short interest down to 0.5% of the free float from over 2% about a year ago.

“I would expect 2025 to be one of the greatest years ever for videogames, and I assume Sony will get a large piece of that,” said Pelham Smithers, an analyst specializing in gaming stocks whose London-based firm offers research on Japanese equities.

The PlayStation’s compatibility with games made by other companies gives Sony an edge over rival Nintendo Co., whose consoles are limited to in-house titles, Smithers added. Other expected blockbusters for 2025 include Capcom Co.’s Monster Hunter Wilds.

Sony’s gaming and network services segment accounts for around 37% of its revenue, with sales reaching ¥1 trillion ($6.4 billion) in the three months through September. The company beat earnings expectations in the latest quarter and raised its outlook as strength in games and music offset uncertainties over its semiconductor business.

Read: Sony Working on Handheld Console for PS5 Games to Rival Switch

In anticipation of the holiday season, Sony launched a $700 “Pro” version of its PlayStation 5 in mid-November. Still, its recent success is largely down to moves to reduce dependence on consoles and focus on software and intellectual property, according to Junichi Inoue, portfolio manager and head of Japanese equities at Janus Henderson Investors.

Games, music and movies are “inherently cash-generative” businesses that help the company weather volatility in the chip sector, said Inoue, whose Japan Opportunities Fund holds Sony shares. Top-quality management also makes Sony “an ideal company for a buy-and-hold investment,” he added.

“Strategic” acquisitions have expanded the company’s entertainment and IP businesses in recent years, Inoue said. Sony announced Thursday it will take a 10% stake in publishing firm Kadokawa Corp. next month, a move that will tighten its grip on the creator of hit role-playing game Elden Ring, which is set to release a sequel next year.

Despite the recent run up in its stock, Sony still trades at a lower earnings multiple than Nintendo and its other main console competitor, Microsoft Corp. It’s also cheaper than fellow large-cap Japanese tech names, like Hitachi, suggesting there’s room for it to climb further in 2025, said Damian Thong, head of Japan equity research at Macquarie Capital.

“Games are coming back into the forefront” and profits look sustainable, said Thong, who hiked his price target for Sony by 17% to ¥3,950 earlier this month. The stock currently trades at around ¥3,300. “The valuation is cheap, and they’ll deliver the earnings growth - it’s a nice combination,” said Thong.

Analysts overall have struggled to keep pace with the stock’s ascent — the average price target is up about 9% from a September low. The Street remains bullish, with 24 buy ratings on Sony versus five holds and one sell.

Next year will present some challenges, including a possible strengthening of the yen and operational risks in China from Donald Trump’s expected trade war with Beijing. Software and games are seen as less vulnerable to tariff hikes than hardware shares, however.

“Sony stands out at this moment because it doesn’t suffer as much from the worries people have around geopolitics,” said Thong. “Media games are not really an issue of national security.”