Sony suffered a $10 billion setback following a reduction in PS5 sales projections. However, a more concerning issue looms in its gaming segment, with margins hitting a nearly decade-long low.
Last week, Sony’s stock plummeted by approximately $10 billion as the tech giant slashed its sales forecast for the fiscal year, notably for its flagship PlayStation 5 console.
Analysts, already skeptical of Sony’s ambitious PS5 targets, highlighted a deeper concern: the dwindling margins in its crucial gaming division.
Sony revised its PS5 sales estimate for the fiscal year ending in March to 21 million units, down from the initial 25 million units projection. This announcement triggered a sharp decline in the company’s stock value, erasing roughly $10 billion, according to CNBC’s calculation using FactSet data.
However, analysts focused on another critical indicator—the operating margin in the gaming business—which dipped to just under 6% for the December quarter, down from over 9% in the same period of 2022.
Atul Goyal, an equity analyst at Jefferies, emphasized that while the cut in shipment forecast for PS5 was disappointing, the primary concern lies in the alarmingly low operating margin. He noted that prior to the January-to-March quarter of 2022, margins in the gaming unit ranged from 12% to 13% over four years.
Despite various favorable factors such as robust sales of first-party games in digital format and the high-margin PS Plus subscription service, which reportedly commands a 50% margin, Sony’s margins remain at historic lows.
Goyal criticized the discrepancy between the surge in revenue from digital sales and add-on content and the decade-low margins, deeming the situation unacceptable.
Serkan Toto, CEO of Kantan Games, suggested that while hardware production costs may have decreased over time due to economies of scale, rising software production costs, exemplified by the hefty budget for games like “Spiderman 2,” have been squeezing margins.
Concerns about margin compression were echoed by industry experts, who highlighted the need for Sony to address the profitability challenges in its gaming business amidst rising production costs.
Requests for comment from Sony and Insomniac Group regarding these concerns were not immediately answered.
