Divya Nettimi – Avala Global
Long Sony — the key thesis points are:
(1) Market underappreciates the quality of Sony’s assets and the recurring revenue/profit mix shift over the next few years. Sony is a misunderstood conglomerate with three key assets: Gaming, Image Sensors, and Music, all of which are number one in their respective segments.
The company’s gaming business has transitioned from a cyclical hardware-driven business to a subscription and software business. By FY ‘25 ~80% of the gaming business’ revenue will come from subscriptions and software so the profit mix of the business will be higher quality and higher margin. The image sensor business is the largest sensor manufacturer in the world e.g., used in every iPhone. Business is riding tailwinds from the increased content in cars and increased demand for high-quality sensors in phones. Sony Music is less of a focus for the thesis but is also a market leader and is taking share. Should benefit from upcoming streaming price increases.
(2) Operating profits will inflect over the next few years. Both the Gaming and Image Sensor segments faced headwinds over the last two years driven by supply chain issues and lockdowns. Those headwinds are expected to ease over the next two years, which leads to an inflection in operating profits.
Sales of PS5s were supply constrained during the last two years. As those headwinds fade, PS5 sales and installed base should grow 80% vs. FY ‘22. In addition, Avala forecasts console gross profits will go from negative to positive as input costs come down. The net impact is that gaming profits will CAGR at 27% over the next three years. The Image Sensor business has also had headwinds on both the supply and demand side driven by lockdowns in China. As Android volumes normalize, and the company’s supply chain and manufacturing issues ease, margins should increase from ~15% in ‘22 to ~18% by FY ‘25. Avala expects this segment’s profits to CAGR at 22% over the next three years. Gaming and sensors are the primary aspects of the thesis but the other segments are attractive as well. Sony Music continues to take share in the market and as the streaming platforms raise prices, the company should benefit. (3) Attractive Valuation and Risk/Reward. Sony currently trades at 11x Avala’s FY ‘24 estimates. Based on Avala’s forecast for FY ‘25E, they think the stock has a ~58% upside (~30% IRR) with some call options from the company’s equity investments and other investments.
Last updated: 2026-03-07 by automated standardization process