Japanese gaming stocks have seen valuations pressured by AI-driven capital diversion, while Capcom and Konami remain top picks

Overview

The report provides a quarterly update on the Japanese video game sector, combining high-frequency data, industry quarterly results, FY3/27E guidance, and feedback from meetings with covered companies in Japan. The core conclusion is that in 2026, the sector remains under pressure in both capital flows and valuation multiples due to the AI capex theme, geopolitical issues, and macro sentiment; however, companies such as Capcom and Konami continue to execute strongly, and the mismatch between earnings growth paths and valuation discounts is widening.

Core views

First, Capcom and Konami remain the sector's top picks, viewed as long-term compound growth names, and their forward PE has already fallen meaningfully below long-term averages. Second, AI is not merely a disruptive risk for the gaming industry; it is already improving productivity in testing, concepting, prototyping, localization, marketing materials, and community feedback analysis, with Capcom as the clearest example. Third, GTA VI may draw away player attention, but at current valuation levels it could also become a sentiment and capital-clearing event for global gaming stocks outside of Take-Two. Fourth, Nintendo is pressured in the short term by memory prices, but its 2027 software lineup and remaster strategy may bring improvement. Fifth, Square Enix, Bandai Namco, and Nexon still face company-specific issues, with catalog sales, digital profit delivery, and stability in the China business requiring close attention.

Analysis framework

The report uses a combination of top-down and bottom-up analysis: it first observes AI-theme capital flows, revenue tracking for global listed game companies, and industry growth expectations, then assesses individual stock risk-reward through company meetings, game release cadence, high-frequency data such as Sensor Tower, valuation multiples, and earnings forecasts from FY3/27E to FY3/28E.

Methodology notes

• Valuation frameworkFY+1 PE multiple

  Target prices are set using the PE multiple corresponding to earnings in the 5th to 8th future quarters, with increasing focus on FY3/28E PE.

  The report notes that target prices are usually based on FY+1 PE multiples, and over the next six months the valuation window may shift toward FY3/28E PE; covered stocks as a whole are already trading below historical average valuation ranges.

• Industry trackingRevenue tracking of global listed game companies

  Tracks revenue growth of 28 listed video game companies to judge industry demand and cycle position.

  In the March quarter, total revenue for this tracked sample grew 11.3% YoY, implying about 4% to 5% annualized growth relative to the 2018-2019 baseline; expectations for future acceleration are highly influenced by GTA VI.

• Company researchManagement meetings and high-frequency operating data

  Uses company meeting feedback, game revenue trends, user growth, release cadence, and cost changes to validate earnings forecasts.

  The report uses meeting feedback from companies such as Capcom, Konami, and Nintendo, as well as variables including eFootball monthly revenue, game launch plans, memory prices, and declining platform fees to assess the probability of near-term earnings upside surprises.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Capcom Co Ltd

  One of the sector's top picks; the report believes its fundamentals are the clearest and its AI adoption is the most proactive.

  Strengths

  Pragmata sales are above the implied target, and MH Wilds expansion content is more likely to be released; AI testing, concepting, prototyping, and localization are improving development efficiency; the JPY83bn operating profit target and 140 USD:JPY assumption are viewed as conservative.

  Weaknesses

  The release cadence of major games still affects near-term revenue recognition, while overall market risk appetite is suppressed by AI-theme capital flows.

  Comparison

  Compared with other Japanese game companies, Capcom is described as the most forward-looking in addressing AI issues, and its ability to release mid-sized IP is improving more clearly.

  Risks

  Front-loaded R&D spending, delayed game launches, weaker-than-expected sales of MH Wilds expansion content, and adverse JPY exchange-rate movements.

• Konami Group Corporation

  One of the sector's top picks; the report believes eFootball growth and declining platform fees provide clear catalysts.

  Strengths

  eFootball revenue was strong in April and May, with World Cup momentum not yet fully reflected; off-platform monetization has begun in 20 to 30 countries, and platform fees over the next two years may fall from the high-20% range to the low-20% range, with most of the benefit likely flowing to operating profit.

  Weaknesses

  eFootball monetization may slow in the second half of 2026, and the market still worries about a post-World Cup pullback.

  Comparison

  The report believes Konami, starting from about 22x FY3/28E PE, already embeds considerable caution, making risk-reward skew positive.

  Risks

  Post-World Cup revenue pullback, slower user growth, off-platform monetization progressing more slowly than expected, and volatility in the release cadence of standalone games.

• Nintendo Co Ltd

  Near-term pressure from memory prices, but one-year risk-reward is beginning to improve.

  Strengths

  Nintendo is willing to use remasters to supplement first-party release cadence; Pokémon Wind & Waves has been confirmed, and the 2027 lineup could be stronger; details on Switch 2 software and Switch software guidance may help clarify market misunderstandings.

  Weaknesses

  It is still classified by many investors as a memory-price loser, with hardware gross margin and cost headwinds as the main pressure factors.

  Comparison

  Compared with Capcom and Konami, Nintendo's near-term earnings elasticity is more affected by hardware costs, but a stronger software lineup could improve 2027 expectations.

  Risks

  Further increases in FY3/28E memory prices, insufficient acceptance of hardware price hikes, longer development cycles for core AAA titles, and delays in the software lineup.

• Square Enix Holdings Co Ltd.

  The report believes catalog sales growth and the release of Switch 2 versions could lift the earnings floor.

  Strengths

  Catalog sales growth supports the HD Games segment, and overall guidance is fairly reasonable.

  Weaknesses

  Dragon Quest XII development has been delayed again, showing that management still faces execution pressure ahead of the next mid-term plan cycle.

  Comparison

  Versus Capcom and Konami, the improvement story is more defensive and focused on repairing the earnings floor rather than clear high-quality compound growth.

  Risks

  New title delays, insufficient growth in the HD Games segment, and weakening catalog sales momentum.

• Bandai Namco Holdings Inc

  The report remains skeptical about its guidance for a sharp rise in digital business profit in H2 FY3/27E.

  Strengths

  Toy & Hobby growth may still come through even under conservative expectations.

  Weaknesses

  The path to a meaningful rise in Digital profit in H2 FY3/27E is not sufficiently clear, and Dragon Ball Xenoverse 3 is confirmed as more likely to be a FY3/28E title.

  Comparison

  Compared with Capcom and Konami, visibility on earnings delivery is lower.

  Risks

  Digital game profit missing guidance, delays in key games, and slowing growth in toys and hobby products.

• Nexon Co Ltd

  The report acknowledges a substantial error in its 2026 analytical judgment on the company, but low valuation and cash returns provide support.

  Strengths

  2025 was driven by the recovery of MapleStory and the success of new titles such as Mabinogi Mobile; low PE and cash returns may support the share price.

  Weaknesses

  The H2 2026 recovery is still underway and depends on stability in the China business; DNF Mobile DAU and usage-time trends remain under pressure.

  Comparison

  Compared with the sector's top picks, Nexon is more of a low-valuation recovery asset with weaker fundamental visibility.

  Risks

  Continued deterioration in China DNF trends, insufficient contribution from new titles, rising marketing expenses, and unsustainable profit contribution from Arc Raiders.

Key data

• March-quarter revenue growth of global game companies11.3%Combined revenue of the 28 listed video game companies tracked by Bernstein grew year over year.
• Expected industry revenue growth over the next 12 months7.3%The report states that total industry revenue is expected to grow 7.3% YoY on an NTM basis.
• Average FY3/27E PE of covered Japanese gaming stocks19.7xThe report believes sector valuations have shifted from expensive in summer 2025 to below-average levels.
• Average FY3/28E PE of covered Japanese gaming stocks17.7xThe low valuation contrasts with the multi-year double-digit earnings growth potential of some companies.
• Average FY3/27E EV/EBIT of covered Japanese gaming stocks11.9xThis metric takes into account the impact of balance-sheet cash.
• Average FY3/28E EV/EBIT of covered Japanese gaming stocks10.11xThe report cites this as one piece of evidence that valuations have entered a low range.
• Capcom AI testing efficiency case3,000-5,000 hours compressed to 72 hoursCapcom partnered with Google to use agentic AI to reduce manual game testing time.
• Scale of Capcom AI-assisted testing30,000 hours per monthThe report says Capcom is already running about 30,000 hours of AI-assisted testing per month.
• Capcom FY3/27E new game unit guidance12mn unitsPragmata sales were confirmed to be above the internal target implied within this guidance.
• Konami FY3/28E PE starting pointabout 22xThe report believes this valuation already reflects considerable market caution toward long-term growth.

Impact & implications

The report's investment implication is that capital diversion driven by the AI capex theme may have overly compressed valuations of Japanese gaming stocks; if companies continue to deliver earnings, AI-driven productivity improvements gradually show up in release capacity, and global gaming capital is reallocated after GTA VI, then high-quality names such as Capcom and Konami could have room for valuation recovery. Conversely, if memory costs continue to rise, game releases are delayed, eFootball monetization declines after the World Cup, or the China business remains weak, company-level divergence will persist.

Risks

• The AI capex theme continues to attract capital, leading to further derating of gaming stock valuation multiples.
• GTA VI draws away player attention and investor focus; if it does not become a clearing event, it may continue to weigh on Japanese gaming stocks.
• Hardware-related companies such as Nintendo and Sony face rising memory prices and pressure on hardware gross margins.
• Konami eFootball may see monetization decline after the World Cup.
• Execution uncertainty remains around Bandai Namco's digital profit, Nexon's China business, and Square Enix's major title development progress.
• Geopolitical issues, weak consumer demand, and macro risks may continue to pressure consumer-oriented sectors.

What to watch

• Whether Capcom announces MH Wilds expansion content in summer, and whether a Gold edition or Switch 2 version materializes.
• Whether Capcom Pragmata, Onimusha, Resident Evil catalog sales, and FY3/27E operating profit exceed the JPY83bn target.
• Konami eFootball revenue in June, July, and during the World Cup, as well as post-World Cup user and monetization retention.
• The pace of Konami's off-platform monetization expansion beyond 20 to 30 countries, and the transmission of lower platform fees into operating profit.
• Nintendo's 2027 software lineup, Pokémon Wind & Waves, a potential Zelda remaster, and changes in Switch 2 hardware gross margin.
• Whether the launch of GTA VI changes global gaming-stock capital flows and valuation frameworks.
• Whether Square Enix catalog sales remain sustained and whether Dragon Quest XII development progress stabilizes.
• Bandai Namco's path to delivering H2 FY3/27E Digital profit and the scheduling of Dragon Ball Xenoverse 3.
• Nexon's China DNF business, and the launch and operating data of DNF Idle RPG, DNF Classic, and Nakwon.