Advanced micro-devices (NASDAQ: AMD) the stock stumbled at the gate in 2021. The chip giant’s shares have fallen by about 6% so far, outperforming the broad market by a wide margin.
Data by YCharts.
This is surprising because AMD is going to deliver another year of outstanding growth. The company dominates Intel in the CPU market and sits with favorable trends in the GPU (graphics processing unit) space where demand significantly exceeds supply. It can also win big in server processors.
However, this is not the only catalyst for AMD in 2021. The arrival of a new generation of game consoles from Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE) It also appears to be a major headwind for the company – one that could help the chipmaker exceed its own expectations, as it delivers chips for both devices.
The new game consoles are witnessing an unprecedented demand
The PlayStation 5 and Xbox Series X consoles have set the sales cards on fire in recent months. For example, the PS5 has sold 4.5 million units in less than 50 days since its launch on November 12, according to Sony’s third quarter fiscal report in 2020.
The company expects its PS5 console to break the record of its predecessor and exceed sales of 7.6 million units by the end of March. That would be slightly higher than the 7.5 million PS4 units Sony sold from November 2013 to March 2014. According to another estimate, Sony could ship as many as eight million new consoles by the end of this month, though that depends on the company’s ability to acquire more components amid a worldwide shortage of chips.
The long-term picture also looks bright. The PS5 is expected to generate strong sales in the coming years and could eventually deliver 200 million units per third-party forecast. The PlayStation 2 has so far been Sony’s best-selling console with lifelong shipments of around 159 million units, while the PS4 has reportedly shipped around 115 million units. The PS5 could dethrone its predecessor in the long run, as there are millions of console users in an upgrade window.
Microsoft’s Xbox Series X, on the other hand, is also witnessing strong early demand. Niko Partners estimates that Microsoft moved 3.5 million units from its new console in November and December last year. The firm points out that the figure would have been higher if Microsoft had not underestimated demand and manufactured more consoles. Management says the new Xbox is likely to fall short by July this year, and the company reportedly sold out every console it made last quarter.
All of this suggests that the new gaming hardware is likely to remain in high demand, offering many benefits to AMD’s enterprise, built-in and semi-personal (EESC) business.
Image Source: Getty Images.
And the question created a big headwind for AMD
AMD’s EESC revenue increased 176% year-on-year to $ 1.28 billion in the fourth quarter (the segment achieved only 7% revenue growth in the previous year). AMD management attributed an increase in sales of semi-personal chips for this tremendous achievement during the 26-year earnings conference:
Semi-personal sales are increasing year by year and are successively based on the strong demand for the next generation of Sony and Microsoft consoles. Our semi-personal SoC sales are rising faster than the last console cycle, and we expect sales to be better than normal seasonality in the first half of this year, based on current strong demand.
This indicates that the EESC business can still continue to have high growth rates in 2021, which is good news for AMD, as this segment generated 40% of total revenue last quarter. By comparison, in the fourth quarter of 2019, the EESC company made up only 22% of the top line when the new console cycle was yet to begin.
Thanks to the rapid expansion of this business, as well as other growth drivers in CPUs and GPUs, analysts covering AMD shares have significantly increased their revenue estimates over the past month.
Data by YCharts.
At the same time, the stock became cheaper as a result of its withdrawal. AMD is now trading 42 times behind revenue, well below the average revenue multiple of more than 120 in 2020. This should make AMD very attractive to growth investors, as it aims to deliver 37% revenue growth in 2021 after the 45% increase last year.
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