Sony

Sony’s first-quarter fiscal 2026 operating income rose 40% year on year to JPY 476.5 billion, prompting the firm to lift full-year operating income guidance by 8% to JPY 1.72 trillion. The upbeat results and guidance revision were driven primarily by US tariff refunds and yen depreciation.

Why it matters: Operating income substantially exceeded our forecast, mainly due to tax refunds and a weaker yen. Even so, we view the better-than-expected product mix in image sensors as a clear positive. Reflecting these factors, we raise our operating income forecasts for this and next fiscal year by 12% and 9%. The imaging and sensing solutions segment delivered a 23.8% operating margin, its highest first-quarter margin in a decade, and we expect further mix improvement in the second quarter. Sony's 19.9% full-year margin guidance reflects caution for second-half demand but looks overly conservative.

The bottom line: We raise our fair value estimate for Sony by 8% to JPY 5,400 per share and by 5% to USD 34 per US ADR. Despite solid fundamentals, shares remain below last November's level. We believe concerns that artificial intelligence will impair Sony's content businesses are overdone. In the music segment, dollar-based streaming revenue grew 10% in recorded music and 8% in publishing, with no sign of an AI-related impact. The global success of the movie Michael lifted revenue from the jointly owned Michael Jackson catalog, underscoring the value of Sony's catalog investments. PlayStation monthly active users rose 2% year on year to 125 million. We expect a strong first-party release lineup and the launch of Grand Theft Auto VI to drive further gains in active users and user engagement later this year.

Between the lines: The July 28 Kumamoto earthquake appears likely to have only a limited earnings impact. Facilities at the Kumamoto Technology Center are scheduled to restart on Aug. 4 and return to preearthquake operating levels by mid-August.

Sony announced on July 1 that it will discontinue physical-disc production for new PlayStation games released from January 2028 onward. New titles will be sold through the PlayStation Store or via retailers in digital formats, while games released on disc before the cutoff will not be affected.

The decision has drawn criticism from some users. Their concerns include the loss of the ability to freely lend or resell physical games, reduced access to lower-priced used titles, and the possibility that a game could become unavailable for purchase if Sony or the publisher remove it from sale. Dedicated gamers have long been important to the PlayStation community, and Sony should remain mindful of their concerns. However, digital distribution already accounts for the vast majority of PlayStation software sales. We therefore expect the change to have a limited negative impact on Sony’s earnings.

From Sony’s perspective, the decision is economically rational. Physical game sales involve disc manufacturing, packaging, logistics, and retailer margins, whereas digital distribution allows Sony and publishers to retain a greater share of the value chain. A fully digital model could also reduce the extent to which used-game purchases substitute for new-game sales, although the benefit will depend on pricing and consumer behavior.

Sony already obtains substantial user data through PlayStation Network accounts and digital transactions. However, a fully digital sales model should make purchase and engagement data more complete, supporting more targeted marketing, content recommendations, and promotional activity.

Higher manufacturing costs, including memory-price inflation, remain a challenge for console makers. Capturing a larger share of game-sales economics could provide greater flexibility in the profitability of the games and network services segment. This may help Sony limit pressure on console prices, fund promotions, or reinvest in content and services, although the company is not required to pass these benefits directly to consumers.

Some commentators argue that removing physical media will reduce PlayStation’s differentiation from gaming PCs and drive user attrition. We disagree. For consumers, PlayStation remains a lower-cost and simpler platform for playing high-end games than a gaming PC. For developers, it offers efficient access to a large and established user base. PlayStation’s differentiation instead rests on its content portfolio, hardware and software optimization, user experience, online services, and network effects. We therefore agree with management’s view that physical media is not a core source of PlayStation’s competitive advantage.

Our fair value estimate for Sony is USD 34 per US ADR, which implies 22.6 times price/earnings on a fiscal 2027 basis (financial year ending March 2028). In our base-case scenario, we expect Sony’s operating profit from continuing operations to be JPY 1.85 trillion for fiscal 2026, up 27.8% from the previous year, due to the solid growth of the entertainment businesses and margin expansion at the image sensor business, partially offset by the slowing demand due to tariffs and surging memory prices.

While the image sensor business has stagnated in fiscal 2023 due to the retreat of Huawei, and weaker demand and lower product mix amid economic slowdown, the long-term trend of the need for better cameras on smartphones is intact. We expect demand for large sensors on smartphones and market share gains to drive the businesses' sales growth in the midterm. We forecast the revenue for the segment to grow to JPY 2.5 trillion in fiscal 2030 from JPY 2.1 trillion in fiscal 2025.

Our Uncertainty Rating for Sony is Medium. We expect the music segment to be stable, and the consumer electronics and pictures businesses to deliver solid profitability with disciplined cost control, resulting in less volatility and better visibility of Sony's earnings.

As a Japanese company, Sony reports financial results in Japanese yen. Our US ADR fair value estimate is based on an exchange rate of JPY 159/USD 1.

We assign a wide moat rating to Sony. Of Sony’s six business segments, we believe that two (game and network services, and music) are wide-moat, two (entertainment, technology, and services; and imaging and sensing solutions) are narrow-moat, and the rest (pictures and financial services) are no-moat businesses.

Game and network services: wide moat (intangible assets, switching costs, and network effect)

The game and network services segment operates the PlayStation business. The latest console, the PlayStation 5 (PS5), was launched in November 2020 and has shipped over 84 million units by the end of September 2025. The Nintendo Switch, of which 154 million units have been shipped to date, is not a direct competitor, in our opinion, as it was launched much earlier (March 2017), is two generations older in terms of performance, and has more family-oriented games. We estimate that the PS5 has shipped approximately twice as many units as its direct competitor, the Xbox S/X series, and dominates the market share for the most advanced game consoles. We believe the PlayStation business has a wide economic moat based on its intangible assets, switching costs, and network effect.

Since its launch in 1994, PlayStation has consistently been the bestselling game console in each generation, and we believe it has established its brand as a platform for playing cutting-edge games over 30 years. In the past, the user base had to be built from scratch with each new generation of consoles, which used to be a risk factor for the durability of the business. However, with the proliferation of the internet, every user now creates a PlayStation Network account and downloads games to play, and PS5’s backward compatibility with PS4 allows game assets purchased in the past to be transferred to the next-generation platform, creating more stickiness in the ecosystem and making users more likely to stay on the PlayStation platform. As a result, we estimate that more than 90% of PS4 users who upgraded to the next-generation console chose the PS5, and the trough of the segment profit was much smaller than previous generation transitions. The PlayStation Network had 119 million monthly active users as of September 2025, roughly the same size as Nintendo Online, being one of the largest gaming ecosystems, and we believe Sony can maintain the user base over the medium term.

Widespread use of the internet also 1) enabled Sony to introduce monthly subscription plans that allow for online competition and 2) enabled Sony to monetize a single game over a longer period of time by selling additional content, which has also contributed to reducing volatility of the business. As a result, we believe that the game platform business has a much more stable business structure than before.

Recently, cutting-edge games have become playable on PCs in addition to the PS5 and Xbox. Rising development costs are becoming increasingly burdensome for game developers, so, unlike in the past, the number of exclusive games would decrease, and most developers would decide to release games on multiple platforms. In this context, releasing games first on the PlayStation, which has the largest user base, will be most important to recoup development costs, as delivering the same gaming experience on individual PCs with different specifications is costly and there is a constant risk of modification. Therefore, we believe that the PlayStation ecosystem will continue to be important for software developers to deliver the same gaming experience to a larger number of users at a lower cost. While we believe PlayStation’s large ecosystem is valuable to game developers, PlayStation’s strong game assets and the release of many cutting-edge games are also valuable to gamers, and we believe this network effect also contributes to the strength of this business.

While we believe that consoles are necessary in the short term to deliver users equal and consistent gaming experiences, it is possible that in the long term, with the advent of cloud gaming, where most of the processing is done on the server side due to improved communication speeds and latency, consoles will eventually become less necessary. However, we do not see this as a risk for Sony as the games purchased on the PlayStation Network in the past will prevent users from switching to other platforms. In addition, with over 100 million active users, the PlayStation Network would remain an attractive market for game developers. As such, these switching costs and network effects would provide the economic moat that will protect the PlayStation business from competition over the longer term.

Music: wide moat (intangible assets)

Sony's music segment—Sony Music Group—is the second-largest record label in the world and one of the three largest brands in the world, along with Universal Music and Warner Music. The segment is divided into two businesses. Recorded music discovers artists and produces music, including the marketing, distribution, and sale of the music created by artists. Music publishing manages the music catalog. The segment is paid when music is played on streaming platforms such as Spotify and Apple Music, or when music is used in movies, on video platforms such as YouTube, and in video advertising. The internet has greatly increased our exposure to music, and SMG’s revenue has grown at a compound annual growth rate of 14.8% over the past four years. The music segment’s operating margin of approximately 19% is the highest of any Sony segment and similar to competitors such as Universal Music and Warner Music. We believe this segment has an economic moat based on intangible assets.

The internet has accelerated the pace of music consumption and intensified competition among artists. In this environment, the extensive global network of the three major labels, including SMG, is becoming more important for both artists and labels. Artists will prefer to sign with a label with a one-stop support system, such as a larger number of production staff, active promotion strategies, and the ability to negotiate with digital streaming platforms such as Spotify and Apple Music, in order to increase the chances of their music being recognized as much as possible. From this perspective, we believe that music labels are more important than ever, even though it is now possible for artists to interact and deliver music directly to users. As evidence, about 90% of the artists in the Billboard Top 100 for 2023 were associated with major labels, with those that were not mostly consisting of foreign artists or artists who do not yet have a track record of success. Of the Billboard Top 100 songs of the 2010s, only the 100th song came from a group not signed to a major label.

On the other hand, an extensive global network is important in order for labels to find more promising artists. SMG acquired The Orchard, a label with a strong presence in music distribution in 2015; Som Libre, a Brazilian independent music label in 2021; and AWAL, which supports music production and distribution for independent artists was acquired in 2021. As such, we believe that SMG is aggressively acquiring the assets necessary to acquire attractive artists and support them, further solidifying its competitive advantage. According to SMG, in 2023, SMG-affiliated artists held the number one spot in the global Billboard rankings for 30 weeks and accounted for four of Spotify's top 10 global albums. We believe this is a testament to the strength of SMG's intangible assets.

We assign SMG a wide moat rating because it is the second-largest music label behind Universal, with roughly 1.5 times the revenue of third-largest Warner; it is the global leader in music publishing in terms of revenue, having acquired a music catalog of more than 2 million songs through its 2018 acquisition of EMI; and it is expected to have synergies with Sony's other businesses, including games and movies.

Entertainment, Technology, and Services: narrow moat (intangible assets and switching cost)

The entertainment, technology, and services segment is the consumer electronics segment, whose main products include flat panel televisions, earphones, headphones, digital cameras, and smartphones. While Morningstar does not assign a moat rating to the consumer electronics business in general, we believe that the interchangeable lens cameras—which account for more than 80% of the segment's profits—merit a narrow moat rating based on intangible assets and switching costs. Sony's 26.1% share of the entire digital camera market is second only to Canon's 46.5%, but we estimate that Sony is the global leader in the latest product category, mirrorless interchangeable lens cameras, surpassing Canon in value terms. As a result of focusing on the most premium product lines, we estimate that the operating margin for the entire digital camera business, including lenses, is close to 30%, well above the high teens for Canon and Nikon.

We believe that Sony's strength in digital cameras stems from its image sensor, of which it is the largest supplier, and its abundant lens assets due to its earlier transition to mirrorless interchangeable lens cameras.

Over the past decade, interchangeable lens cameras have evolved from traditional single lens reflex cameras to mirrorless cameras, which eliminate the mirror structure because advances in sensor technology have made it possible to focus accurately and quickly without the use of a mirror. Sony is the world's largest image sensor manufacturer, with a 48% market share, and by aggressively applying the technology it developed in the rapidly evolving mobile sensor competition to its interchangeable lens cameras, Sony was the first to introduce a full-frame mirrorless camera in 2013, five years ahead of Canon and Nikon, the two major SLR camera manufacturers.

Importantly, Sony started offering a series of lenses for full-frame mirrorless cameras five years before Canon and Nikon. Users of interchangeable lens cameras own multiple lenses for a single body and switch them out as needed. As a result, they are likely to choose the same brand for their next camera if they have a wide variety of lenses. Switching to another company's system requires replacing not only the camera but also the entire ecosystem, including the lenses, making switching costs high and encouraging users to stay in the same ecosystem. In our view, having a lens lineup that significantly exceeds that of Canon and Nikon has helped develop a number one position in mirrorless cameras and establish an economic moat in the digital camera business.

Canon and Nikon have been able to maintain a high market share by leveraging their extensive lens assets in SLR cameras, which require a mirror structure, but this has delayed their response to the substantial paradigm shift to mirrorless cameras, resulting in a delay of more than five years in the development of lens systems. We believe that Sony's mirrorless cameras will continue to defend their leading position in the mirrorless camera market by leveraging their image sensor expertise and the advantage of the lens assets they have developed over the past decade.

The profitability of Sony's consumer electronics business has historically been very volatile due to intense competition from televisions, smartphones, and PCs. As a result, under the current management team, Sony has successfully minimized risk by spinning off its PC business and outsourcing the production of televisions and smartphones. In our view, these businesses will not become value-destructive in the future.

Imaging and sensing solutions: narrow moat (intangible assets)

More than 80% of the imaging and sensing solutions segment’s sales come from image sensors for smartphones, and according to Omdia, Sony is the world's largest company in this market with a 48% share, well ahead of second-place Samsung Electronics with 18%. We believe the business has a narrow economic moat based on its intangible assets.

Sony has been developing image sensors since the 1970s and has built sufficient scale by adopting them into its own digital cameras and camcorders. Sony pioneered the use of backside illumination technology, which allows more light to be captured in each pixel, and as a result, Sony's sensors have established a reputation for superior image quality and have been an exclusive supplier to Apple since 2011, as well as being used in other brands' flagship smartphones. We estimate that Sony's sensors are even used in some of Samsung’s flagship smartphones, which have been its competitors. These facts demonstrate the capability and brand strength of Sony's image sensors.

As cameras continue to be a differentiator in smartphones, image sensors will remain critical to achieve better image quality in the medium term. In this context, Sony's dominant market share is a great advantage as it allows it to learn about smartphone manufacturers' future development road maps earlier than competitors and to collaborate with them to improve camera performance. In addition, Sony has a 6% stake in a new semiconductor plant to be built in Japan by TSMC, the world's largest foundry company, which is expected to ensure a stable supply of logic semiconductors needed for image sensors. We believe that these strong relationships with supply chain companies also constitute Sony's intangible assets.

PlayStation VR 2 will not only be used for games, but will also be a breakthrough mode of entertainment for media such as movies, music, and sports, and will deliver new demand to the PlayStation ecosystem.

Diffusion of the multicamera technology on handsets, and new demand from the automotive industry, will boost demand for image sensors, from which Sony will benefit.

While tough competition in the electronics industry will continue, the capable management team can control the risk.

Digital appliance businesses, especially handset businesses, are extremely competitive, and so Sony will be unable to achieve excess returns from them in the long run.

Because of overcapacity and depreciation of the US dollar, Sony will fail to regain profitability in the image sensor business.

As the PlayStation 5 and PlayStation VR 2 are too expensive, people will be more interested in the augmented reality experience provided on smartphones.