Sony's (NYSE:SONY) stock recently hit a 20-year high after its second-quarter earnings beat expectations and it raised its full-year outlook.

The Japanese conglomerate's revenue fell 0.4% year-over-year to 2.11 trillion yen ($19.9 billion), but beat estimates by 177.3 billion yen. It attributed that decline to pandemic-related headwinds at Sony Pictures, which largely offset the robust growth of its gaming business.

Sony's net income surged 145% to 459.6 billion yen ($4.3 billion), or 367.82 yen per share, which beat estimates by 288.44 yen. It attributed that stunning earnings growth to higher operating profits at its gaming, music, and consumer electronic segments, which offset a profit decline at its cyclical image sensor business.

A man holds up a PlayStation controller.

Image source: Getty Images.

Sony then raised its full-year revenue forecast from 8.3 trillion yen to 8.5 trillion yen ($80.2 billion), and its net income forecast from 510 billion yen to 800 billion yen ($7.5 billion).

In other words, Sony expects its revenue and net income to rise 3% and 37%, respectively, in fiscal 2020. Those are solid growth rates for a stock that trades at 21 times forward earnings.

Sony's earnings report was impressive and its stock still looks reasonably valued after rallying 40% over the past 12 months. But looking ahead, four tailwinds could still propel the stock toward all-time highs.

1. The PS5

Sony will launch the PS5 on Nov. 12, and preorders for the console in the U.S. within the first 12 hours have already surpassed the first 12 weeks of PS4 sales seven years ago. Sony Interactive Entertainment CEO Jim Ryan recently told Reuters "not everybody who wants to buy a PS5 on launch day will be able to find one."

Sony's updated forecast reflects that demand. It expects its gaming revenue to rise 31% to 2.6 trillion yen ($24.5 billion) for the full year, up from its prior forecast for 26% growth.

It expects the unit's operating income to grow 26% to 300 billion yen ($2.8 billion), compared to its prior forecast for 1% growth, as it generates higher-margin revenue from software sales and PS Plus subscriptions.

Those rosy expectations indicate Microsoft (NASDAQ:MSFT), which sold fewer than half as many Xbox Ones as PS4s over the past seven years, could struggle to win over fickle gamers during the holidays.

Sony's PS5 and PS5 Digital Edition.

Image source: Sony.

2. The evolving "music" business

Sony also raised its guidance for Sony Music, which includes its music, anime, and mobile gaming divisions. It previously expected the segment's revenue to decline 7% for the year, but now expects roughly flat growth at 850 billion yen ($8 billion) -- buoyed by higher streaming revenue, new anime releases, and the strength of mobile games like Fate/Grand Order.

It now expects the segment's operating profit to rise 7% to 152 billion yen ($1.4 billion), compared to its prior forecast for a 9% decline.

3. Strong demand for its financial services

Sony's financial services segment generated tepid growth in the second quarter, mainly due to lower revenue from Sony Life, but it sees the business rebounding in the second half of the year.

It expects the unit's revenue to rise as it nets more gains from Sony Life's investments, and for its operating profit to improve with lower loss ratios for auto insurance and higher profits from Sony Bank's investments.

Sony expects its financial services revenue to grow 12% to 1.46 trillion yen ($13.8 billion) for the year, compared to its prior forecast for 7% growth, and for the unit's operating income to grow 20% to 155 billion yen ($1.5 billion), versus its earlier expectations for 10% growth.

4. Tighter cost controls at its weaker businesses

Sony still expects its electronic products and solutions (EP&S) and Pictures units to post declining revenue and profits for the full year as the pandemic throttles sales of high-ticket items and shuts down theaters.

It expects its EP&S revenue to decline 6% to 1.87 trillion yen ($17.6 billion) for the full year, and its Pictures revenue to decline 25% to 760 billion yen ($7.2 billion). Both estimates were unchanged from its previous quarter.

However, it still raised the operating income forecasts for both segments. It expects its EP&S operating income to decline just 23% to 67 billion yen ($632 million), compared to its prior forecast for a 31% decline, as it cuts operating expenses and benefits from favorable exchange rates.

It expects its Pictures operating income to decline 30% to 48 billion yen ($452 million), compared to its prior forecast for a 40% decline, as it reduces its marketing expenses and relies more heavily on its licensing revenue from TV shows and older movies.

The key takeaways

Sony's strengths should offset its weaknesses throughout the rest of the year, its weaker businesses should stabilize after the pandemic passes, and its stock remains cheap relative to its growth. Therefore, its stock could easily hit fresh highs over the next few quarters.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.