I'm all in on this concept, except for the part about playing "select PS5 games that have been ported over to it".
I would hope that Sony could draw a line in the sand and make either a "portable PS5" that's compatible with all PS5 games, or a "portable PS4" that's compatible with none of them (except through streaming). I don't like the idea of an "in-between" system, as it would create more hassle for developers, and more confusion for customers.
On the development side, this would be a situation like Xbox Series S, which just sticks another tier between Xbox One and Xbox Series X. A large number of PS5 games already have a PS4 version, which probably wouldn't show much difference at the size and resolution of a typical handheld screen. For the PS5 games that don't have a PS4 counterpart, I doubt many developers are eager to go back and make a new, distinct "watered-down" version just to satisfy a new portable.
I also don't know how this would appeal to customers. Would they have to start checking "compatibility lists" to see in their PS5 game of choice works on the system? This wouldn't give much confidence for future games, either.
If it's not feasible to make a portable PS5 at this time, then make a portable PS4 instead, and let customers stream PS5 games from their home PS5 console or from PS Plus Premium. It's too late now to make anything in between.
The problem with introducing a purely PS4 Portable is that it'd be a platform living on borrowed time as the new releases of PS4 games slowly dwindles. Such a device should be made with the expectation of being able to receive new software for at least 5 years, that wouldn't be the case for a PS4 Portable. Yes more legacy software from the PS1/PS2/PSP will also make its way onto PSN that this device could play, but that's a much smaller segment of the market.
At the same time a portable capable of playing all PS5 games is not feasible, the technology just doesn't exist and even if it did the price would be beyond ludicrous.
Sony would be building this device for the sole purpose of keeping folks engaged in the PSN ecosystem, playing more games and spending more money on games and MTX. This device would need to be able to play at least some PS5 games as PS4 support eventually falls away from many of the evergreen titles out there.
The hybrid approach works for 2 simple reasons:
1) Handheld PCs
2) Switch 2
See the brilliance is that many third party devs are already going to be creating versions of their new games that can run on those devices. If the hybrid PS5 Portable I'm proposing is anywhere in the general ballpark of those devices in terms of power then porting the games over would be considerably easier. They'd also be able to utilize PSSR to let this hypothetical handheld punch above its weight class.
Many of SIE's own first party games that've been ported to PC already work on the Steam Deck, so creating a PS5 Portable profile for those games wouldn't be too ludicrous. Future first party PS5 games, some will get PC ports that will work on handheld PCs, so it's just a matter of working out the logistics to create a PS5 Portable profile too. The other first and third party games that're just not possible to port over then fall back on remote play and cloud streaming to be able to play those on the hybrid PS5 Portable I'm proposing.
This is a best of all worlds scenario where the handheld has a MASSIVE back catalog to fall back on, has the prospect of receiving new software for several years and can still rely on remote play/cloud for the more demanding games. Marketing wouldn't be very difficult, just create a new branding and logo like "PS5 Portable Compatible" and slap that on any compatible game on PSN and you're done.