In the last few years, Advanced Micro Devices (AMD) has grown without the benefit of one of its best businesses. The company has long provided chips for the major video game consoles, but the related console business for this cycle peaked all the way back in 2016.
AMD has seen surging demand for CPUs and data center chips, but the semi-custom chips provided to the console companies has collapsed to next to nothing. Both Sony and Microsoft plan to launch new consoles in 2020 with AMD chips providing another revenue boost for the company.
Citing the upcoming PS5 launch, Northland analyst Gus Richard expects a strong 2H for AMD. The analyst noted, “In our view, AMD is well position for 2H:20 as new game consoles launch for the holiday season, and server market share gains accelerate as Milan ramps in Q4. Moreover, we believe these products are relatively immune if the macro weakens.” The analyst rates AMD a Buy along with a $67.5 price target.
A big event for AMD occurred last week. The launch of the PlayStation 5 or PS5 signals that the next console cycle will take place this holiday season despite the COVID-19 impact.
Microsoft is expected to officially release the Xbox Series X later this year with similar plans to the PS5 of hitting retail shelfs in November. The last console cycle kicked off in 2013 and this cycle could be the last with cloud gaming options taking shape.
AMD provides an APU for the consoles which includes a CPU and GPU customized by the gaming companies. The company obtains lower gross margins for the chips, but AMD spends less on R&D while utilizing some of the development work to expand their other CPU and GPU products. The chip company generates solid net margins due to the lower operating costs despite the below company average gross margins.
Back 2016, the semi-custom business accounted for roughly 60% of Q3 revenues due to ~$800 million in console related revenues. AMD has guided towards a similar trend where sales won’t peak for a few years due to the late launch of the products this year.
The good news for shareholders is that AMD expects data center revenues to surge to provide an added boost on these revenues. The company has already seen Ryzen CPU sales surge with the EESC business of the consoles and server chip sales actually declining.
Analysts have Q3 sales surging 25% to $2.28 billion while the target was originally over $2.4 billion before some conservative guidance due to unknown COVID-19 impacts had the numbers reduced. AMD could easily reach the original estimate for ~33% revenue growth in the quarter.
Last Q3 only had about $500 million in combined EESC revenues and data center alone should top $400 million this year and might even reach $500 million alone. AMD could easily top $800 million in revenue from this category leaving only limited CPU/GPU growth in computing and graphics to reach the original revenue estimates.
The key investor takeaway is that AMD is ready to fire away on all cylinders now with the official launch of the PS5. The new console cycle is going to happen this year providing another huge revenue boost for the chip company over the next 3-4 years while AMD also works with Google (GOOGL) Stadia to develop cloud gaming.
The stock has bounced around the low $50s for several months now. Some good news on console holiday sales will quickly help push AMD to new all-time highs around $60.
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