The novel coronavirus pandemic is disrupting supply chains and consumer spending worldwide, and many companies are postponing new product launches until the crisis ends. Those headwinds could impact Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) ahead of their planned gaming console launches in late 2020. It's unclear how long the crisis will last, but several factors suggest that Sony's PS5 and Microsoft's Xbox Series X could face significant delays.
Tracking the disruption
Taiwanese contract manufacturer Foxconn (OTC:FXCNF) assembled a large portion of Sony and Microsoft's previous consoles in China, and will likely manufacture the PS5 and Xbox Series X. Foxconn has gradually reopened its plants, but it still needs to work through a lot of orders -- including Apple's iPhones -- to get back on track.
Even if Foxconn and other contract manufacturers are ready to assemble the consoles, Sony and Microsoft could struggle to secure a steady supply of key components. Prices for DRAM and NAND memory chips are both expected to rise this year as chipmakers curb their supplies, and the supply chain disruptions could exacerbate the shortages.
The PS5 and Xbox Series X will both use GDDR6 RAM -- which transfers data roughly twice as fast the GDDR5 memory used in the PS4 and Xbox One -- and store their data on NAND-based solid-state drives (SSD). Sony and Microsoft could struggle to secure enough of those chips at reasonable prices.
Both consoles will be powered by semi-custom AMD (NASDAQ:AMD) APUs. AMD outsources the production of those chips to TSMC (NYSE:TSM), which operates most of its plants within Taiwan instead of China. TSMC's production capabilities remain stable, but Sony and Microsoft's APUs will be manufactured on the crowded 7nm process, which could face a bottleneck as Apple, NVIDIA, and other big customers place fresh orders for 7nm chips.
E3 2020 -- the annual event where Sony and Microsoft were expected to tease their upcoming consoles -- was also recently canceled. Without that media boost propelling them into the holiday season, both companies could postpone their launches until after CES 2021 next January.
What would a delay mean for investors?
A delayed launch for those gaming consoles would hurt Sony more than Microsoft. Sony's console gaming revenue fell 15% annually in the first three quarters of 2019 and accounted for 24% of its top line. Microsoft's gaming revenue dipped 16% in the first half of fiscal 2020, but only accounted for 8% of its top line.
Both companies attributed the slump to sluggish hardware and software sales as gamers postponed their purchases in anticipation of next-gen consoles and games. However, Sony has fewer growth engines to fall back on than Microsoft.
Sony mainly relied on the growth of its image sensor business, which serves roughly half of the world's smartphone makers, to offset softer sales from its gaming and consumer electronics divisions throughout the year.
However, that business currently faces tougher competition from Samsung and SK Hynix, which both entered the market over the past year. If Sony's image sensor business slows down before it launches the PS5, it could struggle to meet analysts' forecasts for 4% revenue growth next year.
Microsoft is in a more comfortable position since its commercial cloud revenue -- which includes Office 365, Dynamics 365, and its cloud platform Azure -- surged 39% annually last quarter and accounted for 34% of its top line. That robust cloud revenue should offset the softness of its other businesses for the foreseeable future.
The key takeaways
Sony and Microsoft might not delay the launches of their new consoles, but investors should monitor the situation closely. Nintendo recently announced production delays for its Switch consoles, so it wouldn't be surprising if Sony and Microsoft followed suit. If that happens, Sony could take a much bigger hit than Microsoft.