Sony saw around $10 billion in market value vanish this week following its downward revision of sales projections for its leading product, the PlayStation 5 console, for the fiscal year. However, analysts, who had already deemed Sony’s initial PS5 target overly ambitious, highlight a more pressing concern for the Japanese tech titan: the diminishing margins in its pivotal gaming division. They raise questions about why Sony’s gaming margins aren’t higher despite the presence of high-margin offerings such as digital game sales and the PS Plus subscription service.
Last week, around $10 billion of Sony’s market value vanished after the Japanese tech giant revised down its sales projection for its flagship PlayStation 5 console for the fiscal year. Analysts, already skeptical of Sony’s ambitious PS5 target, highlighted a more significant concern: the declining margins in its crucial gaming business. Sony recently announced a reduced sales forecast of 21 million units for the PS5 for the fiscal year ending in March, down from the previous estimate of 25 million units. This announcement led to a decline in the company’s shares, with approximately $10 billion in value lost since the forecast adjustment. However, analysts are particularly focused on another key metric: the operating margin in the gaming business, which stood at just under 6% for the December quarter, compared to over 9% in the same period of 2022.
“The cut in shipment forecast for PS5… isn’t the disappointing aspect… What’s disappointing is the low level of operating margin,” noted Atul Goyal, equity analyst at Jefferies, in a client note on Wednesday. He highlighted that prior to the January-to-March quarter of 2022, margins at Sony’s gaming unit averaged around 12% to 13% over the preceding four years. Goyal expressed disappointment with the latest quarter’s single-digit margin, despite several factors that should have boosted margins to around 20%. These factors include the increasing sales of first-party games in digital format and the high-margin PS Plus subscription service, which Goyal estimates commands around a 50% margin.
“Their revenue from digital sales, add-on content, and digital downloads are at all-time highs… And yet their margins are at decade-lows. This is just not acceptable,” Goyal stated in an email to CNBC. He clarified that the current margin for Sony’s gaming business is “almost near decade lows.” The analyst questioned how, despite the presence of these higher-margin products, the gaming division’s operating margin has remained so depressed.
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