Part2: Industry Research on Video Games in Japan : SONY

Part 2: Looking closer at SONY: SONY games and SONY Music could be as good or even considered better business than Nintendo and Universal Music respectively contrary to the mainstream narrative

Mar 12, 2026

Summary: Both Sony Games and Sony Music have higher sales and higher operating income than their peers Nintendo and Universal Music respectively. This was not the case a few years back, but the mainstream narrative that Nintendo and Universal Music are superior business hasn’t change and the investment community still views Nintendo and UMG as the leaders and the most valuable assets in their respective industry. Nintendo is worth 60 billion USD in enterprise value and 72 billion USD in market value alone. Universal Music is currently at a enterprise value of 41 billion USD - although was trading at a much higher price not long ago. Sony Music is trending to earn 45% more in operating income than UMG based of fiscal 2025 ending March 2026. On the same ratio, Sony Music could trade at 60 billion USD. Sony as a whole trade at 130 billion USD. Sony has 3 other business, including a dominant position in image sensor which should generate 350 billion yen or 2.3 billion USD in current fiscal year. Last year, the image sensor division earned 260 billion yen so operating income has increased by 34%. Such a business should probably trade at more than 20x operating income or 50 billion USD. These 3 business alone are worth (65+60+50) 175 billion USD. Add Sony Pictures (20 billion USD( and Sony Entertainment (10 billion USD) and we are at 205 billion USD. So the market value of these 5 entities could be valued at roughly 50% higher than current market value. Sony has generated 10 billion USD in the last 12 month and is net cash. Since its 3 main segments should be valued at 20x operating income - as a whole Sony should be trading at 20x operating income in my opinion.

ME with my favorite orange jeans casually chating with Tom Holland on the reason why Sony is trading at such a discount!

Spider man movie rights are the most important IP for Sony Pictures. New Spider Man movie will come out on July 31st.

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Part 1 ReCap

Before we start the analysis on Sony, lets go over again over the summary table of the 5 companies we have introduced in Part 1 of the Industry research on video games in Japan.

In Part 1, we have focused on the console wars, and concluded that Sony PS5 is winning in terms of performance, unit sold and critically software attach rate. X-Box has become a marginal console in this cycle with only 2m units sold in 2025. Nintendo had a very good start and sold 17.3m units in 2025. PS5 - a 5 year old console has sold 17.2m units to reach 92m units since launch.

We are forecasting that due to the underwhelming performance in CPU and GPU of the Switch 2 compared to PS5, Nintendo 3rd party revenue from the Switch 2 will still be limited in this cycle as the previous one. Furthermore, the capability to sell AAA 3rd party titles on the Switch 2 will be significantly limited after 2026-2027 timeframe. In 2028, hardware requirements for AAA titles will increase significantly after the likely launch of the PS6 in 2027.

We then turned our focus on Capcom and we were impressed by the results growth since 2015:

Unit sales has quadrupled (4X) since 2015 from 13m units to 54m units projected.
Sales has tripled (3X)
Operating income has multiplied by seven (7X) .

Capcom is one the most consisting and steady grower in the industry. A large portion of the sales is related to catalog sales so it is not as hit driven. It has 3 major franchises: Resident Evil, Monster Hunters and Street Fighter. Last week, Capcom released Resident Evil 9, which has sold 5 million units in just 3 days, its fastest release to reach 5 million copies. Game reviews are almost perfect. This bodes well for fiscal 2026 and fiscal 2027. RE9 will be very significant for this mid cap company. The stock did go up 10% on the news up from when we published 2 weeks ago but still trade at a reasonable 18x EV/EBIT.

Nintendo raised almost 15% since our post. It is trading at a more fairly valued 25x EV/EBIT.

Sony has been down a few % since our post and is trading at the cheapest ratio of the list. Lets move to Sony and look at the Sony Game and Network Service first:

Sony Game and Network Services

The IP

God of War is one of the most important IP for Sony video game. Some of the games released over the last 3 consoles shown below:

Although not owned by Sony, Spider man developed by internally owned Insomniac studio is the most popular game developed by Sony for the PS5. This is a critical IP for PS5. Gran Turismo is a very consistent IP for Sony have generated 90m units over its history. The last of US and Uncharted developed by naughty dogs (acquired in 2001) have both generated 40m units each.

Since the release of the PS5, in November 2020, the Revenue of the Sony G&NS division has more than doubled. Sales shown are in million yen.

The early years of a new platform often leads to negative earnings, as hardware platform in the early cycle are sold at lost, but not this time:

Fiscal 2020 was the worst year in their console cycle - it is the year where gamers basically stop making purchase of the old console and where both developers and gamers refrain from releasing/ buying games. From 2021 to 2024, the operating income of Sony was impacted by selling a large amount of consoles at loss and a limited amount of PS5 active. Sony gets a 30% cut from game sold on the PS5. Sony does not disclose its operating income/loss separately related to hardware.

However, the slide below part of the Q3 2025 presentation clearly state the losses from hardware was smaller YoY, so hardware is still sold at a loss even in 2025.

The gaming division is currently projecting to make 510 billion yen or 3.24 billion USD in operating income in fiscal 2025 (ending March 2026), or more than double the operating income it made in 2020, and 65% more than in 2019 in the later part of the previous console cycle (PS4).

I have captured the sales split of the gaming console business since 2019.

As shown below, higher margins sales related to digital software and network services had plateaued in 2021-2023, after a jump from 2020, but then have climbed fast in fiscal 2024 and fiscal 2025, thus the significant rise in operating income.

In contrast, hardware sales with negative operating margin, which have risen since the launch in fiscal 2021, has more of less plateaued since 2023.

The chart shows the number of PS5 sold since fiscal 2021.

9months fiscal 2026 sales as shown below is following the same trend with high single digit growth in digital software, low double digit growth in Network Services and and mid to high single digit decline in hardware sales.

To sum up, as I mentioned in the previous post, PS5 has won the 3rd party AAA game console wars and is reaping the benefits. The Switch 2 released last year, is already CPU constrained for high end game released this year and must be downframed at 30FPS to make it playable. Furthermore, complex open world game like GTA6 will not be supported by the brand new Switch 2 due to CPU limitation. X-Box will likely release the Xbox Helix when PlayStation 6 will be released in 2027 at a much higher price than PS6. There is a high likelyhood that the next console market will be dominated by PS6 again.

Sony must be doing something right since the latest 2 consoles have generated significantly more income than its previous iterations:

This slide was published last year, so it does not take into account the current fiscal year, so considering 2025, PS5 has already generated 16.3B of operating income, and by the time PS6 is out, will probably generate around 23-24B of income, assuming 7B of operating income for 2026 and 2027 in total. This cycle will thus generate almost 3 times what PS4 has generated, which was the best console in terms of operating income before.

Nintendo historical results comparison

The following chart captures sales from Sony and Nintendo since 2019. Sony seems to be on a much higher growth trajectory than Nintendo since the launch of the PS5. It will be interesting to see how sales will translate on a going forward for 2027 and beyond.

If we look at the operating income, Nintendo was generating a lot more income since the launch of PS5 in 2020 until fiscal 2024. The reasons were explained in the previous section. Note that in 2019, both company were generating the same level of income.

If we compare the console market in terms of users, Sony has stated in the latest quarter that it has 132m monthly users. In contrast, Nintendo do not publish monthly users, only yearly users, ie users that have used a Nintendo software on the Switch (or Switch2) in the last 12 month and was connected to the internet. The Annual Playing Users is currently at 128m and to convert to monthly users, some estimates considers using a 70% factor, leading to around 90m users. Thus, Sony monthly users is about 46% higher than Nintendo.

If we look at the 8 year Switch 1 console cycle - the total amount of operating income achieved by Nintendo is 23.4B. So, Nintendo thanks to its very strong IP has generated about the same income for the Switch 1 than Sony is projected for the PS5 cycle.

As I discussed in the latest post, the GTA6 effect will be a big push towards the PS5 in the later part of this year. The GTA has a huge pent-up demand, and will be running only on PS5 and Xbox at launch. Hardcore PC gamer may not want to wait 1 year plus and may buy a PS5 or PS5Pro. Xbox being marginalized - with only 2m unit shipped in 2025 - most of sales will be on PS5. It is expected that 40m copies of GTA6 will be sold in the first year. The Switch 2 will not be able to support GTA6. PC support will come later, a year or 2 later. Expect close to a Billion USD in operating profit for Sony to come from this game alone over the fiscal 2027 and fiscal 2028 based on a 30% cut.

In summary,

Switch 1 and PS5 will generate about the same operating income for Nintendo and Sony respectively (about 23-24B).
PS5 will have a very strong end of cycle due the GTA6 effect.
Switch 2 had a good start and sales will be mostly driven by first party release as in the previous cycle. 3rd party sales will remain marginal especially when PS6 will come out.
I suspect that PS6 and Switch 2 will earn similar operating income like in the previous cycle but likely higher. Conservative estimates for Switch 2 is around 30 billion USD to 40 billion USD for the full cycle - ending 2034. I suspect PS6 will earn similar level.

As such, I would make the case that Sony game market value should be similar to Nintendo or about 65 billion USD. Considering that Nintendo is viewed as currently undervalued versus historical average, that market value for Sony Games could also be considered undervalued.

Now lets turn to Sony Music:

Sony Music

Sony Music has acquired over the past 40 years, some of the largest music labels.

Columbia Records (1988)

Contemporary: Beyoncé, Adele, Harry Styles, Miley Cyrus, Lil Nas X, and Rosalía.
Catalog : Bruce Springsteen, Bob Dylan, Celine Dion, AC/DC, Billy Joel, and Johnny Cash.

RCA Records (2004)

Contemporary: SZA, Doja Cat, Tate McRae, P!nk, Shakira, Justin Timberlake, Alicia Keys, and A$AP Rocky.
Catalog: Elvis Presley, Whitney Houston, and David Bowie.

Epic Records

Contemporary : Travis Scott, Future, 21 Savage, Tyla, and Meghan Trainor.
Catalog: Michael Jackson, Ozzy Osbourne, and Sade.

The Orchard (Distribution)

Music distribution company that provides services to independent labels. Through this arm, Sony handles the global distribution for Bad Bunny.

Sony Publishing is the largest publisher in the world since the EMI merger:

Catalog: Queen, Carole King, Pink Floyd, and the legendary Motown catalog (Stevie Wonder, Marvin Gaye, The Supremes).
Contemporary: Kanye West, Pharrell Williams, Drake, P!nk, Calvin Harris, Sia, and Alicia Keys.

Publishing only gets 15% of the streaming revenue, versus 50-55% for the recording label.

Recording music represents 350 billion yen of sales versus 108 billion yen for Publishing in the latest quarter.

The following shows Sony Music sales since 2019. 2026 is based on the forecast for the year ending March 2026.

Sales have grown strongly about 2.5x since 2019 for a CAGR of 14%.

Operating income did grow even faster (3.4x) as operating margin increased by 400BP resulting in a CAGR of 19.4%. Operating income and sales have been accelerating in recent years. Now, operating income represents 2.8 billion USD.

Such a high growth business and a light business company should be worth at least 20x operating income or 60 billion USD at a minimum.

Comparison with Universal Music

The mainstream narrative is that Universal Music Group is the most valuable and important music label of the industry, but when I compare sales in the recent years, I find that Sony Music sales has surpassed Universal Music group this year. Please note that we compared Sony fiscal year ending March 2026 with UMG calendar year ending year 2025. Universal sales has been growing much slower in the past several years - CAGR of 5.6% versus Sony Music 14%.

Sony is generating significantly more operating income about 45%.

As I mention before, Sony with operating income of 2.8 billion USD should be worth a range of 60 billion to 70 billion USD considering recent growth (19% CAGR on operating income) and the business light model. This is truly a gem in the Sony empire.

Imaging & Sensing Solutions

Sales increase in 2025 is due to the continued trend toward larger size, higher image quality and higher performance image sensors for mobile products, primarily in high-end smartphones, and the resolution of the manufacturing yield issues that began in the fiscal year ended March 31, 2024, which led to both sales and operating income reaching record highs.

Sony has a dominating market share of the image sensors business with 57% market share versus 53% a few years back. Sony is the exclusive image sensor provider for Apple. It is aiming for 60% market share. Image sensors are used in smartphone (largest market), but critical emerging markets in cars, robots and drones.

Sales in this segment has more than doubled since since 2021.

Operating income has grown steadily. Operating income margin is projected to reach 16%, up from 14-15% level in previous year. At 2.3 billion USD, operating income growing quickly with a dominant market share of 53% - Samsung is #2 - and new business segments in car, drones and robots, this business is worth more than 20x operating income. or about 50B in my opinion.

Latest Q3 updates

Sony released on Feb. 6th their latest forecast for fiscal 2025. Sony is projecting to achieve an operating income of 1540 billion yen for fiscal 2025 or 10 billion USD, which represent a 20% increase over fiscal 2024. The majority of the increase is coming from Sony Game and Sonic Music.

Shareholder yields

Shareholder yields is define by the sum of buybacks, dividends and paying back debt.

Sony has bought back around 1.5% of shares per year in the last 2 years, and is planning to buyback another 90m shares in the first 5 months of this year. 25m shares was bought just in the last month.

The Sony Financial spin off has also significantly clean up the balance sheet resulting in a sharp drop in net long term debt by 20 billion USD in the last 12 month. Sony still owns 16% of Sony Financial and could sell more shares of Sony Financial to buy back more shares.

Sony also pays 22.5 yen per share in dividends or about 0.5% yield.

Historical valuation

Sony is currently trading at a significant discount to historical valuation - 12.5x EV/EBIT according to TIKR versus a mean of 16x.

Pros

Sony games business has seen a sharp increase in operating profit in the last 2 years (fiscal 2024 and fiscal 2025 ending March 2026), and should just accelerate in fiscal 2026 with some strong releases in 2026 including GTA6 release. At least for this cycle, the vast majority of AAA 3rd party consoles software sales ends up being PS5 Software Sales.

Sony balance sheet is now clean with no debt after the spin off of Sony Financial which should allow Sony to accelerate buybacks.

Sony Music has more sales in fiscal 2026 and has generated consistently higher operating income than Universal Music group in recent years. Currently projected to generate 40% to 45% more operating income than UMG in current fiscal year.

The image sensor business is dominant and operating income has accelerated in recent years at 20% CAGR.

Those 3 business Games, Music and image sensor represents 85% of the market value of Sony group, are dominant in their respective industry and are growing at double digits.

There are good synergies between Sony Music, Sony Pictures and Sony Gaming in terms of sharing IPs. There is some synergies between Sony entertainment and Sony Games (hardware).

Earnings over the next 2 years are expected to be considerably higher (GTA 6 effect on Sony Games, continued strength for Sony Music and Image sensor).

Currently trading at only 13x EV/EBIT, lower than historical average.

Cons

Sony entertainment is operating in a very competitive environment - consumer electronics.

There is little synergies between Sony Image sensor, a semiconductor pure play and the rest of the business.

Sony Games is cyclical - following a 8 year console cycle. Each console cycle can lead to market share gain or loss.

Earnings for fiscal 2028 and fiscal 2029 might be down due to the release of the PS6.

Memory price spike could lead to more operating losses from hardware than projected.

The USA is the most important market and tariff is causing a headwind to consumer electronics and hardware sales. Sony Music, Sony Pictures and SW sales are immune to tariff.

Sony management does not have skin in the game, and is not lead by a founder. We prefer founder led company or family own business.

The image sensor business is capex intensive although Sony has recently made a deal with TSMC.

It is currently plan to cover Bandai Namco and Square Enix in the next post.

All posts will remain public for a two-month window before moving to the archive. This provides ample time for our community to read and discuss the analysis while the thesis is fresh.

However, my research is proprietary. By limiting long-term public access, I am taking necessary steps to protect the content. I write for individual investors—not to provide free data for search engine scrapers, AI training models, or institutional funds.

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