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Sony’s $10 Billion Plunge After PS5 Sales Cut Masks Deeper Concerns Over Gaming Margins

Sony's $10 Billion Plunge After PS5 Sales Cut Masks Deeper Concerns Over Gaming Margins

Analysts Highlight Declining Margins as Key Issue Amidst PS5 Sales Forecast Revision

Last week, Sony witnessed a staggering $10 billion decline in its stock value following the revision of its sales forecast for the flagship PlayStation 5 console, raising concerns among analysts about the company’s gaming margins.

Analysts, already skeptical of Sony’s ambitious PS5 sales targets, emphasized a more significant issue: the declining margins in its gaming business, a vital revenue stream for the tech giant

Sony revised its sales projection for the fiscal year ending in March, reducing it to 21 million units from the initial forecast of 25 million units. This downward revision led to a sharp decline in the company’s shares and wiped approximately $10 billion off its stock value

While the cut in the PS5 sales forecast grabbed headlines, analysts focused on the operating margin within Sony’s gaming division, which stood at just under 6% for the December quarter, down from over 9% in the same period of 2022.

Neon PlayStation logo

Atul Goyal, equity analyst at Jefferies, highlighted the disappointing trend in operating margins, noting a decline from around 12% to 13% in the gaming unit’s margins over the previous four years.

Despite record-high revenues from digital sales, add-on content, and digital downloads, Sony’s gaming margins remain at near decade-lows, prompting concerns among analysts about the underlying profitability of the business.

Serkan Toto, CEO of Kantan Games, suggested that rising software production costs, exemplified by the substantial budget for titles like “Spiderman 2,” have contributed to the squeeze on margins, offsetting any potential savings from reduced hardware production costs.

As hardware costs are expected to decrease over time, Toto pointed out that escalating software production expenses have put pressure on gaming margins, highlighting the need for Sony to address this imbalance.

While Sony and its subsidiaries have not commented on the issue, analysts continue to monitor the gaming division’s performance closely, emphasizing the importance of restoring margins to sustainable levels amidst evolving market dynamics and increasing competition in the gaming industry.