Sony Stock Plummets as PlayStation 5 Sales Forecast is Cut and Margins Decline
Last week, Sony’s stock took a significant hit as the Japanese tech giant revised its sales forecast for its flagship PlayStation 5 (PS5) console. The company now expects to sell 21 million units of the PS5 in the fiscal year ending in March, down from its previous forecast of 25 million units. This announcement caused around $10 billion of value to be wiped off Sony’s stock, according to CNBC calculations using FactSet data.
While the sales forecast cut was a concern for analysts, the bigger issue lies in Sony’s declining margins in its gaming business. The operating margin in the gaming division came in just under 6% for the December quarter, a significant drop from the more than 9% margin in the same quarter of 2022. Atul Goyal, an equity analyst at Jefferies, expressed disappointment in the low level of operating margin, stating that margins were around 12% to 13% in the previous four years leading up to the January-to-March quarter of 2022.
Goyal highlighted that despite various factors that should have driven up margins towards 20%, such as high-margin products like first-party games and the PS Plus subscription service, Sony’s margins remain at decade-lows. Sales of digital downloads, add-on content, and digital downloads are at all-time highs, but the margins do not reflect this success. Goyal finds this situation “extremely disappointing” and believes it is unacceptable.
Serkan Toto, CEO and founder of Tokyo-based games consultancy Kantan Games, suggested that hardware production costs have actually decreased over time since the PS5 is more than three years old. He believes that Sony would have better economies of scale by now. However, Toto points out that rising software production costs, such as the $300 million budget for Sony-owned Insomniac Games’ “Spiderman 2,” have had a significant impact on gaming margins.
The combination of declining margins and a revised sales forecast has raised concerns about Sony’s gaming business. Investors and analysts are questioning how the gaming division’s operating margin has remained so depressed despite the success of high-margin products and increasing digital sales. Sony and Insomniac Group have not yet responded to CNBC’s requests for comment on the matter.
The decline in Sony’s stock value serves as a reminder that even tech giants face challenges and uncertainties in the gaming industry. As the competition intensifies and production costs rise, companies like Sony must find ways to balance profitability while meeting consumer demand for innovative gaming experiences. The future of Sony’s gaming business will undoubtedly be closely watched by investors and industry experts alike.