As soon as the Japanese tech giant Sony cut its sales forecast for its flagship PlayStation 5 console for the fiscal year, around $10 billion of its stock value was wiped off last week. As per the analysts, who already thought Sony’s PS5 target was too lofty, a bigger issue for the company are its declining margins in its key gaming business.
Sony PS5 sales as announced by the company will be 21 million units of in the fiscal year ending in March. This Sony PS5 sales has dropped compared with a previous forecast of 25 million units.
Sony stock value
Sony shares dropped after the announcement, with around $10 billion of stock value wiped off since the forecast cut, as per a data.
But analysts were watching another key metric the operating margin in the gaming business which came in just under 6% for the December quarter. By contrast, Sony’s operating margin was more than 9% in the December quarter of 2022.
Sony PS5 margin
“The shipment forecast cut for PS5 … is not what is disappointing … What is disappointing is the low level” of operating margin, Atul Goyal, equity analyst at Jefferies, said in a note to clients on Wednesday.
Adding that prior to the January-to-March quarter of 2022, margins at the gaming unit were around 12% to 13% in the previous four years.
The latest quarter’s single-digit margin for Sony is present “despite various tailwinds that should have driven up the margins towards 20%,” Goyal said, adding that the situation is “extremely disappointing.”
Goyal qualified that the current margin for Sony’s gaming business is “almost near decade lows.”
The analyst questioned how, with all of these higher-margin products, the gaming division’s operating margin has remained so depressed.
Sony gaming business production cost
Serkan Toto, CEO and founder of Tokyo-based games consultancy Kantan Games, said he believed hardware production costs have actually come down, since the PlayStation 5 is more than three years old and Sony would have better economies of scale by this time.
Toto said that part of the reason why margins are being squeezed more recently is that software production costs have been rising.
Analysts are questioning why Sony’s gaming margin is not higher despite higher-margin products like digital sales of games and its PS Plus subscription service
