Investing.com -- Japanese video game stocks have soared in the early months of 2025, with the sector experiencing an average increase of 12.6% year-to-Friday, outperforming the broader Nikkei index, which saw a decline of 7.5%.

In a Tuesday note, Bernstein analysts attributed the rally to a combination of factors including a bright fundamental outlook.

The sector witnessed a sell-off on Friday, which Bernstein analysts found surprising. They note that the pullback was likely influenced by high valuation multiples, significant global inflows into the sector, and the fluctuating Japanese yen exchange rate.

Investors with short-term horizons may note a lighter industry launch slate following the success of Capcom’s "Monster Hunter Wilds," which could lead to the annual trend of conservative full-year guidance.

On the flip side, Wilds extends the impressive performance of Japanese video game developers and the growing strength of anime.

“In a market buffeted by macro and geopolitical crosswinds, we do wonder if the sector can act as a safe haven of sorts in the next few years,” analysts led by Robin Zhu wrote in the note.

In terms of investment recommendations, the analysts favor Capcom stock, as the successful launch of "Monster Hunter Wilds," with 8 million units sold in three days, positions the company favorably for the fiscal year ending March 2026 and beyond.

“A pull-back post launch was unsurprising given the stock had become crowded,” the analysts said. “But we expect the grumbling over PC optimisation to blow over, and the next few years look set to be a busy period for new Capcom launches.”

Capcom shares are currently trading at forward price-to-earnings (P/E) multiples in line with the sector, as opposed to its historical 20% premium.

The report also points out the market’s acceptance of Xbox’s decline as a hardware ecosystem, suggesting that Microsoft (NASDAQ: MSFT ) Gaming will continue to thrive as a third-party publisher.

This shift could bolster the bull case for PlayStation, with Bernstein anticipating PS5 hardware sales to remain robust, offering an attractive risk-reward profile for Sony (NYSE: SONY ), which is trading at 15.5 times forward earnings for the fiscal year ending March 2027.

Regarding the anticipated announcement of the Nintendo Switch (NYSE: SWCH ) 2 on April 2, analysts note widespread optimism among Japanese video game developers. While a share price fluctuation around the event is expected, any dip in Nintendo Co Ltd (TYO: 7974 ) stock is likely to be seen as a buying opportunity as investor focus shifts to peak cycle profits.

Bernstein sees potential in other areas of the sector, with Konami’s eFootball poised for growth, especially with the upcoming World Cup in 2026.

Bandai Namco continues to see strong growth in its Toy & Hobby segment, although its forward valuations now align with faster-growing peers.

Lastly, Square Enix’s recent rally has been puzzling to the analysts, but they believe the stock could be a difficult short due to its modest positioning, earnings expectations, and the impact of moderate launch successes on profit estimates.