This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.
The markets say that this year’s Electronic Entertainment Expo (E3) had one big winner, AMD's stock, (NASDAQ:AMD) thanks to a plethora of solid announcements from the company and its partners at the show.
AMD’s stock opened the trading week at a 13-year high, and has been outperforming its close rival (NASDAQ:NVDA) as well as the broader Philadelphia (INDEXNASDAQ:SOX) semiconductor index for the past three months.
During this period, AMD’s stock is up approximately 39%, while Nvidia’s is down nearly 11%. The Philadelphia semiconductor index, a weighted index composed of companies involved in the design and manufacture of semiconductors, is up 4.2% during the same time period.
Although E3 has just officially kicked off in Los Angeles, over the weekend Microsoft (NASDAQ:MSFT) announced that the next version of its console would be powered by custom silicon from AMD. Prior to E3, inside sources from AMD confirmed to Wccftech that Sony’s PS5 would also be powered by team red silicon. This puts AMD into a similar position as the last generation, with both major consoles being powered by its chips.
Something for the Peasants, Something for the Masters
Prior to the official kickoff of E3, AMD also announced new competitively priced GPUs based on its latest RDNA core architecture as well as new entries into its well-received Ryzen family of CPUs. These announcements complement AMD’s Computex announcements which included the announcements of the much anticipated Zen 2 core architecture.
Consoles are an important source of revenue, but ultimately the PC is king. The overall Gaming PC market is something that’s still growing, compared to the broader PC market which has flatlined. IDC expects the Gaming PC market to grow to 8.2% year-over-year in 2019, compared to a 3.3% contraction for the broader PC market.
The strength of the Gaming PC market should be good news for Nvidia as well, but a glut of its inventory in the channel thanks to the burst crypto mining bubble is dragging things down. In its most recent earnings, Nvidia said gaming revenue is down 39% from a year ago and up 11% sequentially. The inventory glut is clearing, but there is still some more work to do.
Data Center Deadweight
The success of AMD's stock on the markets is thanks to its exposure to both the CPU and GPU sectors (much of the Philadelphia index is made up of single-chip businesses), but also the fact that it’s not burdened by overexposure -- something that has been dragging Nvidia down.
As GPGPU compute has evolved into the mainstream, Nvidia has been making big strides to incorporate GPUs into data centers and high-performance computing research clusters via its Nvidia Tesla product portfolio. As the complexity of workloads in this environment grows, and new markets like AI open up, GPU acceleration is a must-have. Effectively Nvidia has shifted from what was virtually a pure gaming company at the turn of the last decade to a GPU company, with a diverse set of product lines all powered by its GPU offerings. Now data centers are the second biggest revenue source for Nvidia, accounting for about 25% of the company’s revenue.
But this diversification has also been a drag on the company. The data center bubble, which fuelled Nvidia’s meteoric rise throughout 2016, is ready to pop. Intel’s (NASDAQ:INTC) latest earnings reported the data center market outlook to be bleak thanks to weakness from China and dwindling sales due to overcapacity.
AMD’s exposure to the data center is much more narrow, in comparison. But more importantly, it is approaching the data center market in a different way: with both GPU and CPU offerings. Even though the market is sluggish, excitement about AMD’s new CPU server offering, EPYC, is driving sales. The price-performance ratio, and integration with AMD’s GPU offerings, makes a compelling case for price-conscious data center managers -- particularly in China -- where the economy is weak and budgets are being cut.
AMD is expected to report its next quarterly earnings in late July.