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Sony's Gaming Division Profit Margin Plummet: A Decade-Low Crisis

Sony wiped out nearly $10 billion in valuation stock last week after the Japanese tech giant cut sales forecasts for its flagship PlayStation 5 console for the fiscal year. Analysts who already thought Sony's PS5 target was too high told CNBC that the biggest issue for the company is its declining profitability in its core gaming business.

Sony announced this week that it now expects to sell 21 million units of the PS5 in the fiscal year ending in March, up from its previous forecast of 25 million units.

Shares of the company plunged after the announcement, wiping out about $10 billion in stock since the forecast was cut, according to a CNBC estimate using FactSet data.

But analysts were looking at another key metric operating profit in the gaming business which reached just under 6% in the December quarter, according to CNBC calculations. By comparison, Sony's operating profit in the December 2022 quarter was up 9%.

“The shipment forecast cut for PS5 ... is not what is disappointing ... What is disappointing is the low level,” Jefferies equity analyst Atul Goyal said in a note to clients the goods on Wednesday.

He added that the profitability of the gaming sector was 12% to 13% in the last four years before the January to March 2022 quarter. Sony had single-digit margins for the last quarter “despite various tailwinds that should have increased margins to 20%,” Goyal said, adding that the situation was “very disappointing”.

These tailwinds include sales of its first-party games, which are increasing in the form of digital downloads, in addition to its high-margin PS Plus subscription service that commands around 50% margins, according to Goyal.

Last quarter, Sony's operating margin in the gaming segment was estimated to have fallen to 6% nearly a decade low. The year before, this rate rose to 9%, and by early 2022 it was 12 to 13% over a typical four-year period.

Given the current growth in in-game sales and subscriptions to the PS Plus service, according to Jefferies representatives, Sony's operating margins could be closer to 20%, but not higher than 6% According to unofficial sources for reference, Spiderman 2 alone needed to cost Sony around $300 million when it hit the market last year. Analysts say Sony should look for opportunities to save money in this area.

Conclusion: Despite these challenges, Sony remains determined to reinvigorate its gaming segment and return to profitability. The company is exploring strategies such as investment in new technologies, strategic planning, and expansion to expand its exclusive brands to revive customer interest and boost revenue.