PlayStation DualSense controller and PlayStation 5 console.
Jakub Porzycki | Nurfoto | Getty Images
Approximately $10 billion in value was lost. sony’s Shares plunged last week after the Japanese tech giant lowered sales forecasts for its flagship PlayStation 5 console for the fiscal year.
Analysts who already thought Sony’s PS5 targets were too high told CNBC that the bigger problem for the company was declining margins in its core gaming business.
Sony announced this week that it expects to sell 21 million PS5 units in the fiscal year ending March, compared to its previous forecast of 25 million units.
The company’s stock price fell after the announcement, with about $10 billion in value wiped from the stock since the estimate cut, according to CNBC calculations using FactSet data.
But analysts are focused on another key metric: the gaming business’s operating margin, which CNBC calculated was just under 6% in the December quarter. In contrast, Sony’s operating margin for the December 2022 quarter was over 9%.
“The downward revision to PS5 shipment forecasts…is not a disappointment, but rather a result of poor operating margins,” Jefferies equity analyst Atul Goyal said in a note to clients on Wednesday.
He added that the gaming division’s profit margin for the past four years prior to the January-March 2022 period was around 12-13%.
“Despite various tailwinds that should have pushed margins towards 20%, Sony’s margins for the most recent quarter have remained in the single digits,” Goyal said, calling the situation “very disappointing.” ” he added.
According to Goyal, these tailwinds include the high-margin PS Plus subscription service, which boasts margins of around 50%, as well as sales of first-party games, which are increasingly sold in digital download formats. .
“Revenues from digital sales, add-on content, and digital downloads are at record highs…yet margins are at their lowest in 10 years, which is completely unacceptable,” Goyal said in an email to CNBC. ” he said.
Goyal identified current profit margins in Sony’s gaming business as “the lowest in nearly a decade.”
Analysts questioned why the gaming division’s operating margins remained so weak despite these high-margin products.
Serkan Toto, founder and CEO of Tokyo-based games consultancy Kantan Games, said it has been more than three years since the PlayStation 5 was released, and by that time it would have surpassed Sony’s scale. He said he believes the cost of manufacturing hardware is actually going down because the economy should be improving.
Toto said part of the reason margins have been under pressure recently is the rising cost of producing software.
Spider-Man 2, released last year and produced by Sony’s Insomniac Games, cost about $300 million to make, according to gaming website Kotaku, citing an internal presentation leaked after an attack by a ransomware group. That’s what it means. hacked company.
“Thus, these budgets seem to have a significant impact on gaming profits over time,” Toto said.
Sony and Insomniac Group did not immediately respond to CNBC’s requests for comment.
