- Both AMD stock and Nvidia stock have enjoyed a great year in 2016.
- In the past, Nvidia stock would rally at the expense of AMD stock.
- So what has changed now?
Leading GPU chip manufacturers AMD (NASDAQ:AMD) and NVIDIA (NASDAQ:NVDA) have enjoyed a stellar year, with AMD stock clocking an year-to-date gain of ~210% vs. ~180% for NVDA stock, some of the best gains in the tech sector. A good chunk of those gains have come over the past few weeks with AMD stock surging 23% over the last one month, after the company inked a pivotal deal with Google that will see its GPUs go into the latter's cloud servers. Meanwhile, NVDA stock has tucked on gains of more than 30% after the company reported impressive Q3 earnings two weeks ago. Is Nvidia's success not hurting AMD?
The Changing Competitive Landscape
This year has been an exception since it's quite rare for stocks of the two GPU rivals to rally simultaneously. Prior to the current rally, AMD stock had been badly hammered after the company continuously lost GPU market share to Nvidia. Five years ago, the two companies held GPU market shares in a 60/40 ratio in favor of Nvidia, which gained more ground, taking that ratio to 80/20. But how did AMD get here?
Also Read: AMD Looks Set For An Even Better 2017
A host of issues brought AMD down. One of these was AMD's famous battle with chip giant Intel (NASDAQ:INTC) in the 64-bit CPU market. For a brief moment in history, AMD managed to outgun Intel in 64-bit CPUs, which gradually replaced 32-bit CPUs. AMD managed to grab 25% of the x86 server market by 2006 before Intel responded with a series of devastating attacks that helped it claw back nearly everything it had lost. AMD now commands less than 1% of the server chip market.
AMD's losing battles with Intel in the CPU market greatly weakened it, leaving it with little cash to invest in the rapidly-growing GPU market. AMD was unable to keep up with Nvidia in process nodes, forcing the company to only compete in certain markets rather than delivering across the board advancements. AMD has mainly been focusing on the low and mid-tier GPU markets where it has been trying to steal market share from Nvidia by delivering superior performance per dollar.
Luckily for AMD, the strategy seems to have worked, and AMD's GPU market share has been steadily increasing over the past four quarters. AMD gained 12% market share in Q2 2016 compared to Q2 2015, a remarkable achievement considering the company's Polaris cards had just been released and their effect had therefore not been fully felt.
Source: Jon Peddie Research
AMD is winning in the console market
While those kinds of wins are enough reason to feel bullish about AMD stock, there's an even better reason: AMD is winning big time in the Embedded and Semi-Custom segment, a market where Nvidia is almost non-existent. This segment is now bigger than the GPU/CPU segment for AMD and brought in 60% of its revenue during the last quarter.
AMD supplies APUs (integrated CPU/GPUs) to Sony Corp (NYSE:SNE) and Microsoft (NASDAQ:MSFT) for their respective gaming consoles. Both companies have released significant console upgrades in the current year, which is strongly bullish for AMD because console sales are typically strongest during the first few years of an upgrade cycle. Even better is the fact that both Microsoft and Sony are planning to shift to smaller but more frequent console upgrades instead of the usual seven-year cycle. This offers some measure of protection for AMD's console chip business which might not see a severe downturn in the coming years.
Also Read: Better Buy: Nvidia Stock Or AMD Stock?
Nvidia could, however, be planning to make a comeback in the console market. Nintendo recently revealed Switch, a hybrid gaming console which is powered by Nvidia's Tegra CPUs instead of AMD's traditional APUs. Although Nintendo is considered the underdog in the console world compared to Microsoft and Sony, the main threat to AMD would be if Microsoft and Sony considered launching their own hybrid gaming devices.
Nvidia is winning too...but not at AMD's expense
Nvidia posted revenue of $2B during the third quarter, good for 53% Y/Y growth and a big improvement compared to a year ago when the company was growing in the high single-digits.
According to CEO Jen-Hsun Huang:
"We had a breakout quarter - record revenue, record margins and record earnings were driven by strength across all product lines. Our new Pascal GPUs are fully ramped and enjoying great success in gaming, VR, self-driving cars and datacenter AI computing. We have invested years of work and billions of dollars to advance deep learning. Our GPU deep learning platform runs every AI framework, and is available in cloud services from Amazon, IBM, Microsoft and Alibaba, and in servers from every OEM. GPU deep learning has sparked a wave of innovations that will usher in the next era of computing."
Nvidia's current success, therefore, seems to hinge strongly on the emerging artificial intelligence industry, a field where AMD is only getting started, rather than strictly on GPUs. Nvidia has quickly become the leader of the artificial intelligence and deep learning market and has built the giant cuDNN deep-learning library. Mizuho analysts say that only 0.1% of servers have been deployed in deep learning purposes, so there's plenty of room for the market to run.
But the fact that Google Cloud has tapped AMD GPUs to accelerate machine learning in the cloud is a clear validation of AMD's GPU computing and growing AI capabilities. Nvidia might have established itself as the early leader, but AMD probably won't be far behind 2-3 years down the road. Nvidia stock has been winning due to AI while AMD stock has been winning due to a resurgence in the console gaming market. These are two disconnected markets and therefore Nvidia is not winning at AMD's expense.
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