Faster Console Refreshes A Boon For AMD Stock

  • Microsoft and Sony are planning to move to frequent incremental upgrades for their respective consoles.
  • This is a shift from the past when the two relied on massive hardware upgrades every 6-7 years.
  • This should provide a nice boost for AMD, a company that supplies console CPUs and GPUs to the two companies.

A new cycle of video game console refreshes is on the way, and that should provide a fine boost for AMD (NSDQ:AMD), a company that relies heavily on sale of semi-custom console SoCs to drive the top line.

After more than a decade of production, Microsoft (NSDQ:MSFT) has finally sounded the death knell for Xbox 360 by discontinuing its production, and has instead introduced two new ''half-consoles'' into the Xbox One family: a sleeker more powerful Xbox One S that will be released later this year as well as a still-in-development console codenamed Scorpio to be unveiled in 2017. Scorpio will feature a more powerful GPU and will be capable of handling 4k gaming. Microsoft has already partnered with Oculus and gamers can stream Xbox One games on Oculus Rift headsets that are connected to Windows 10 PCs.

AMD stock has been on a tear with the shares tucking on gains of 70% year-to-date. Part of the rally has been fueled by investor anticipation of the upcoming consoles.

AMD YTD Share Returns

AMD-1

Source: CNN Money

But Microsoft was not the only console-maker to unveil new consoles at the Electronic Entertainment Expo, or E3. Sony Corp (NYSE:SNE) and Nintendo followed suit each with its own announcement. Sony did not announce PS4 updates per se but it did preview its upcoming virtual reality headset. The company also promised that a console refresh is on the way.

Meanwhile, Nintendo said that it intends to release a new console dubbed the NX, in 2017.

Faster Console Refreshes is Great For AMD

The flurry of console refreshes have come sooner than expected, considering that Xbox One and PS4 were released only two years ago while Nintendo's Wii U was a bust.  A console generation used to last 6-7 years at the minimum.

Maybe the console era is drawing to a close as is being alleged in many quarters. Console sales, especially for older consoles,  have taken a dive, with reports emerging last year that Xbox 360 sales had plunged 70%. Microsoft probably decided to kill the console to free up more resources for productive use. Xbox 360 is reputed to have achieved lifetime sales of 80M consoles, slightly behind Sony's 83M for PS3.

In the case of Microsoft, the company is trying to converge Xbox and Windows with future games planned to be released on both platforms. Microsoft is now moving to an incremental upgrade model for its consoles instead of one big release every seven years or so. This is pretty much what the company is doing with Windows, with Windows 10 being the last OS Microsoft will release.

This is good news for AMD, which supplies APUs(integrated CPU/GPU) for both Xbox One and PS4. AMD reports sales of semi-custom consoles SoCs in the Enterprise, Embedded and Semi-Custom segment. During the last quarter, the segment posted revenue of $372M, 44.7% of revenue but still a jaw-dropping 25% year-over-year decline. It's quite evident that poor console sales is the main culprit here.

For instance, Microsoft sold 10M Xbox One consoles within the first year after its release, but only managed to sell 6.7M consoles in the following year, a huge 33% drop. But it's not just lower volumes that have been hurting AMD, but thinner margins as well. Microsoft has repeatedly cut Xbox One prices from an introductory price of $499 to the current $230 (sale price of $350 and $120 worth of free games). IHS estimated two years ago that AMD was receiving $100/Xbox One console sold. But it's possible that that has now been cut in half, possibly worse.

New console upgrades will therefore not only mean higher sales volumes for AMD, but also much better margins. In any case, the new 4k-capable APUs the company will sell to Microsoft and Sony are likely to sport fatter margins than their predecessors.

With the console industry moving to incremental upgrades instead of massive upgrades every 7-8 years, AMD's semi-custom segment could be in for a good time. That should keep AMD stock sizzling.

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