Sony plunged $10 billion after its PS5 sales cut. But a bigger issue is its near decade low games margin

Around $10 billion of value was wiped off Sony’s stock last week, after the Japanese tech giant cut its sales forecast for its flagship PlayStation 5 console for the fiscal year.

Analysts, who already thought Sony’s PS5 target was too lofty, told CNBC a bigger issue for the company are its declining margins in its key gaming business.

Sony this week announced it now expects to sell 21 million units of the PS5 in the fiscal year ending in March, compared with a previous forecast of 25 million units.

The company’s shares fell after the announcement, with around $10 billion of value wiped off the stock since the forecast cut, according to a CNBC calculation using FactSet data.

But analysts were watching another key metric — the operating margin in the gaming business — which came in just under 6% for the December quarter, according to a CNBC calculation. By contrast, Sony’s operating margin was more than 9% in the December quarter of 2022.

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

He added that prior to the January-to-March quarter of 2022, margins at the gaming unit were around 12% to 13% in the previous four years.

The latest quarter’s single-digit margin for Sony is present “despite various tailwinds that should have driven up the margins towards 20%,” Goyal said, adding that the situation is “extremely disappointing.”

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

“Their rev (revenue) on digital sales, add-on-content, digital-downloads are at all time highs… And yet their margins are at decade-lows. This is just not…