What are implications of potential PlayStation 5 Pro launch on Sony’s financials

Recent rumors have pointed to rising expectations in the games industry that Sony (NYSE: NYSE:) could roll out a PS5 Pro, an upgraded PS5 model. In a Friday note, Citi analysts discussed what a PS5 Pro launch could potentially mean for Sony’s financial performance.

“Although we believe the firm makes regular design modifications in order to reduce costs, we have made no specific assumptions about a PS5 Pro launch,” analysts said.

“If a PS5 Pro were to be launched, we think it could improve margins and boost earnings to some extent, although it would depend on the Cost of Goods Sold (CoGS) structure,” they added.

According to Citi, several factors support the potential launch of a PS5 Pro.

First, the timing of a potential PS5 Pro launch appears favorable, particularly when considering the challenges faced by the PS5’s initial rollout, such as COVID-19 disruptions and chip shortages. These factors have delayed the PS5’s market uptake by one to two years compared to its predecessor, the PS4.

Releasing a Pro model now, five years after the original PS5 launch, aligns with a natural product cycle, especially since Sony released the PS4 Pro three years after the PS4.

Moreover, Sony’s decision to participate in the Tokyo Game Show in 2024, after a five-year absence, suggests the company might be planning a significant announcement. Also, the introduction of rival consoles could push Sony to counter with an upgraded PS5 model.

Citi analysts believe The PS5 Pro could also address profitability concerns, as both the original PS5 and its Slim variant have less favorable CoGS structures compared to previous PlayStation generations.

Therefore, the Japanese tech giant “may decide it is worth launching a high-priced Pro model to improve the console’s margins, even if it means sacrificing sales volume,” analysts noted.

However, there are notable risks associated with launching a PS5 Pro.

Sony’s president has previously stated that there are no plans to alter the core semiconductor processes of the PS5. While some adjustments to the semiconductors and system design are possible, these changes are unlikely to result in significant cost reductions.

In addition, the introduction of a more expensive model could slow adoption rates due to lower sales volumes. The recent price hikes for the PS5 in Japan also contradict the typical inventory reduction strategies that precede a new product launch.

Historically, announcements of console upgrades have positively impacted Sony’s share price.

“It may well be, in our view, that the announcement of the PS5 Pro is well received,” analysts highlighted.

“If it is announced, our focus would be on improvements in the CoGS structure and performance and on the resultant opportunities for expanding game software.”