Strong PS4 Sales Could Indicate Upside For AMD Stock

  • Sony has posted a surprise profit during its latest earnings call, thanks to strong PS4 sales.
  • PS4 console chip sales account for the largest component of AMD's semi-custom sales.
  • This could give a significant boost to AMD's top- and bottom-lines, and Advanced Micro Devices, Inc. stock.

Shares of Sony Corp (NYSE:SNE) have climbed nearly 6% in five days after the company posted fiscal Q1 results that managed to log a surprise profit thanks to strong PlayStation sales. The multimedia conglomerate reported revenue of ¥1.61T($15.66B), an 11% Y/Y decline while FQ1 diluted EPS of ¥16.44 ($0.16) represented a massive 77% Y/Y drop but was nevertheless a pleasant surprise for investors and Wall Street who were bracing for a loss. A strengthening Yen, which is up close to 19% YTD against a basket of major currencies including the Dollar and Euro, is partly to blame for the double-digit top and bottom-line declines. The biggest culprit to blame for the declines, however, are the infamous Kumamoto Earthquakes that devastated Sony's sensor fab in the region.

Strong PS4 sales

Sony investors were delighted to learn that the surprise profit was made possible by strong PS4-related sales. Specifically, Sony said a sharp increase in PS4 software was responsible for the surprise beat on the bottom line. Sony's Game and Network Services (G&NS) posted revenue of ¥300.4B (21% of total revenue) after growing 14.5% Y/Y(25% in constant currency). That was by far the best growth posted by any of the company's segments.

People usually upgrade en masse just before the next generation of consoles hit the market. Sony recently released an update for PS4 Systems software that will help gamers enjoy new features on the upcoming PS4 console dubbed PS4.5 or PS4 Neo to be released later this year.

This is a big positive for Advanced Micro Devices, Inc. (NSDQ:AMD), which sells APUs (integrated CPU/GPUs) to both Sony and Microsoft Corporation (NSDQ:MSFT) for PS4 and Xbox One, respectively. Microsoft is set to release a sleek Xbox One console dubbed Scorpio this year and a more powerful VR-capable console next year. All indications are that AMD will be charged with the task of supplying processor chips for the new consoles.

Microsoft no longer breaks out Xbox One sales but said in its recent earnings release that Xbox Live monthly active users grew 33% year-over-year to 49 million.

AMD's Semi-Custom Segment Is A Direct Beneficiary

That explains why AMD's semi-custom segment performed so well during the last quarter. The segment, which mostly consists of console chip sales, posted revenue of $592M, good for 5% Y/Y and 59% Q/Q growth, thus overtaking the PC and Graphics segment which posted revenue of $435M. The semi-custom unit posted operating profit of $84M, up 210% Y/Y compared to an operating loss of $81M for the CPU/GPU segment. PS4 has lately been outselling Xbox One at an almost 2:1 ratio so most of that revenue and profit is directly tied to PS4 sales.

AMD's semi-custom segment had suffered a huge decline during the last few quarters due to slowing console sales. Gamers usually buy in droves for the first few years of a console upgrade cycle before sales begin to taper off. Console upgrade cycles tend to take as long as 7-8 years, which means a company like AMD can see an extended slump in console chip sales as gamers wait for the next console.

But with the upcoming console refreshes, AMD could see robust sales over the next two or so years. There are unconfirmed rumors that Sony and Microsoft might ditch the long console upgrade cycle in favor of smaller and more frequent upgrades. The companies' two upcoming consoles do not represent an entirely new console generation but are actually major performance upgrades on their existing consoles, aka half consoles. So there might be some truth to those rumors. If things pan out this way, then AMD is unlikely to see a huge decline in console chip sales in coming years.

Investor Takeaway

Strong PS4 sales are a big plus for AMD since they drive most of the segment's revenue and profits. The upcoming consoles by Sony and Microsoft might give a big boost to AMD's top and bottom-lines, as well as to the Advanced Micro Devices, Inc. stock.

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Comments on this article and AMD stock

Pascal is actually a failure on Nvidia's part to provide a reasonable future-ready GPU technology. AMD's Polaris is by the far the more flexible and future-proof platform for gaming as well as compute performance. Once Vega is released with 15+ Billion transistors, it will pretty much crush anything with the Pascal name on it. Nvidia is already starting to lose market-share. AMD will redifine HPC clustering with Zen + SSG GPUs. Architecturally this is how high-performance APUs will work. AMD pretty much leads in all DX12 titles for consumer and consoles. Zen APUs will eventually replace laptops and all-in-one platforms with VR-ready mainstream solutions at mainstream prices. Nvidia is a one-trick pony at the moment and NVDA stock is very inflated and will only go down as it loses-market share. AMD should double or triple over next year
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