New Consoles Are a Game Changer for AMD

Jon Markman

For the first time in seven years, the two leading video game console makers are releasing new hardware. The timing could not be better.

Sony (SNE) will produce 10 million PlayStation 5 console units, according to a report Wednesday by Bloomberg. That’s double the number of units the company expected to make only 4 months ago.

It’s another data point in the bull case for Advanced Micro Devices ((AMD) -Get Report), the company that makes PS5 microprocessors.

Until recently, the Santa Clara, Calif.-based company lurked in the shadow of its larger competitors. Its central processing units, used to power personal computers, laptops and servers at data centers, were bested by Intel ((INTC) -Get Report). And its graphic processing units, common to gaming computers and consoles, often took a back seat to more powerful GPUs from Nvidia ((NVDA) -Get Report).

Everything changed in 2019. AMD product managers finally beat rivals to market with new, industry leading 7 nanometer chipsets.

Then the pandemic happened. Something remarkable followed.

Suddenly, millions of people were stuck at home, pecking away on old computers that needed replacing, and playing video games to break up monotony of evenings filled with Jeopardy and reruns of The Bachelor.

The timing was perfect. Demand for new laptops intensified. Interest is gaming broadened as Dad played Fortnite with the kids. And it all happened exactly as AMD was building the best gear in its 50 year history.

This is important because something transformational is happening. Covid-19 is taking gaming into the mainstream. The industry is thriving across every demographic. People of all ages are experimenting with different forms of entertainment. In the absence of TV sports, many are landing on gaming for its immersive, communal experiences.

Microsoft ((MSFT) -Get Report) reported in April that its Game Pass service surpassed 10 million players. Multiplayer engagement is up 130%. Meanwhile, the Washington Post noted that video game sales jumped to $1.6 billion in March, up 35% from a year ago.

AMD managers last year began plotting to become a key hardware vendor to the future of gaming.

They announced in March 2019, a major contract win to supply high performance GPUs to Google data centers for Stadia, the search giant’s first foray into video game streaming. Earlier this year a Microsoft touted that its new X-Box game console would be powered by AMD GPUs. And Sony revealed its PS5 would run on AMD processors, too.

By all accounts, the next generation of gaming hardware is going to be a game changer. AMD’s new processors will give game developers the power to build fully immersive, jaw dropping, photorealistic settings for their gameplay.

The Unreal Engine 5 demo, running on PS5 is cinematic in quality.

Now Sony is raising the stakes for PS5. The increased production rate reflects the increase interest in gaming during the pandemic. It also reveals that Sony product managers are confident the new console will be a hit with consumers. The PS4, for example, did not reach 10 million units sold until its second year of availability.

The bigger story for AMD is one of branding. The partnerships with Microsoft, Google and Sony move the company out of the shadows of Intel and Nvidia. AMD is now at the vanguard gaming graphics. That’s likely to translate favorably into AMD’s other GPU businesses, like high end PC gaming setups and even data centers.

In upgrading the shares Tuesday, an analyst at Cowen and Co noted strong, predictable product execution and the prospect for longer-term data center server revenue growth. The price target moved to $65 from $60.

Shares now trade at 36.3x forward earnings and 9.2x sales, after a rally of 63.5% this year.

I’m looking to move back into AMD shares into either a decline to $46, or a rally above $58. I will advise soon.