Approximately $10 billion of value was erased from Sony’s stock last week after the Japanese tech giant revised its sales forecast for its flagship PlayStation 5 console for the fiscal year.
Analysts, who already believed Sony’s PS5 target was overly ambitious, conveyed to CNBC a larger concern for the company: its declining margins in its pivotal gaming business.
Sony recently announced its adjusted projection to sell 21 million units of the PS5 in the fiscal year concluding in March, down from a previous estimate of 25 million units.
The firm’s shares experienced a downturn following the disclosure, with approximately $10 billion in stock value wiped out since the forecast revision, according to a CNBC computation utilizing FactSet data.
However, analysts were closely monitoring another critical metric — the operating margin in the gaming business — which stood just below 6% for the December quarter, as per a calculation. In contrast, Sony’s operating margin exceeded 9% in the December quarter of 2022.
“The shipment forecast cut for PS5 … is not what is disappointing … What is disappointing is the low level” of operating margin, remarked Atul Goyal, equity analyst at Jefferies, in a note to clients on Wednesday.
He further noted that before the January-to-March quarter of 2022, margins at the gaming unit averaged around 12% to 13% over the preceding four years.
The current single-digit margin for Sony in the latest quarter is notable “despite various tailwinds that should have driven up the margins towards 20%,” Goyal added, characterizing the situation as “extremely disappointing.”
These tailwinds encompass sales of its first-party games, increasingly in digital format, alongside its high-margin PS Plus subscription service, which commands around a 50% margin, according to Goyal.
“Their rev (revenue) on digital sales, add-on-content, digital downloads are at all-time highs… And yet their margins are at decade-lows. This is just not acceptable,” expressed Goyal.
Goyal qualified that the present margin for Sony’s gaming business is “almost near decade lows.”
The analyst pondered how, with all these higher-margin products, the gaming division’s operating margin has remained so subdued.
Serkan Toto, CEO and founder of Tokyo-based games consultancy Kantan Games opined that hardware production costs have decreased, considering the PlayStation 5 is over three years old and Sony would benefit from improved economies of scale by this point.
Toto suggested that part of the reason for the recent margin squeeze is the rising costs of software production.
“Spiderman 2,” released last year and developed by Sony-owned Insomniac Games, reportedly incurred a cost of around $300 million, as per gaming website Kotaku, citing an internal presentation leaked after a ransomware group breached the company.
“So these budgets seemed to have a significant impact on their gaming margin over time,” Toto remarked.
