Sony stock loses $10 billion in value as company lowers PS5 sales forecasts

Sony shares lost $10 billion in value last week after the tech giant lowered its forecast for this year’s PlayStation 5 sales.

However, according to financial analysts reporting to CNBC, there is a bigger problem behind this announcement. Although Sony’s decision to lower its forecast of 25 million PS5 sales in the coming fiscal year to 21 million caused the company’s stock to plummet, the move is just a symptom of a bigger problem at the tech giant, according to Jefferies equity analyst Atul Goyal.

Goyal said that Sony’s “PS5 forecast cut (…) is not disappointing.” Rather, it is due to a decline in the company’s operating margin in the gaming space. For those who don’t know, an operating margin refers to a company’s remaining profit after all operating costs are covered.

According to CNBC, Sony’s operating margin in the gaming industry was just under 6 percent last quarter. That’s significantly lower than the 9 percent we saw this time in 2022. Goyal also added that Sony’s margins had been around 12 to 13 percent for the past four years before the start of 2022. The analyst called this margin decline an “extremely disappointing” trend.

What’s particularly strange is that revenue from digital sales and additional content is “at an all-time high.” This means that while Sony has a profitable games division, it’s also costing the company a lot of investment money.

According to Serkan Toto, CEO of Tokyo-based games consulting firm Kantan Games, this reduced margin is due to the exploding costs of game production, which have a “significant impact” on potential profits.

Back in 2020, Shawn Layden, former chairman of Sony Interactive Entertainment Worldwide Studios, predicted that the PS5 era would bring an even more costly development process. “I don’t think you can take (development costs) in the next generation and multiply them by two and expect the industry to continue to grow” (via Kotaku).

In response to “bloated AAA budgets,” our own Rhys Wood recommends that we prioritize smaller games in 2024—advice that could also be useful to executives.

As expensive as their production may have been, the best PS5 games and that best PS5 exclusives are excellent games in themselves.