AMD’s gaming business is struggling

Most investors focused on Advanced Micro Devices‘ (AMD 4.21%) AI accelerator business as the company announced its fourth quarter financial results on Tuesday. The company expects to sell at least $3.5 billion in data center GPUs in 2024 and has enough supply to meet additional customer demand beyond that number.

AMD’s artificial intelligence chip business is expected to boom this year, but other parts of the company are likely to struggle. The gaming business, which consists of gaming GPUs and semi-custom chips that power major video game consoles, will have a tough year, even though AMD expects overall revenue to increase.

aging game console

AMD’s semi-custom chips power both SonyPlayStation 5 and microsoftThe latest Xbox game console. The chip combines AMD’s Zen 2 CPU architecture and RDNA 2 graphics architecture in one package.

These semi-custom deals have lower margins than selling high-performance CPUs and GPUs to PC gamers and power users, but they provide a reliable revenue stream for gaming consoles over multiple years. It has the advantage of giving you AMD may also power its next-generation game consoles, as backwards compatibility is often a selling point and sticking with the same architecture is the path of least resistance for console makers.

The PS5, Xbox Series X, and Xbox Series S have collectively sold around 80 million units since their launch in 2020. New consoles from Sony and Microsoft may not be released until 2026 or 2027, but current generation consoles are on sale now. We are entering the maturity stage of the product cycle. Supply constraints caused by the pandemic are now a thing of the past, and demand no longer exceeds supply.

The consequence for AMD of the current console generation, now in its fifth year, is that semi-custom revenue will decline significantly going forward. AMD expects gaming revenue to decline by a “significant double-digit percentage” in 2024. The company expects a sequential 30% revenue decline in the first quarter as customers burn through inventory.

AMD has great power in developing next-generation game consoles, but its semi-custom business will deteriorate over the next few years, weighing on the gaming division’s performance.

Competitive graphics card market

Gaming GPUs are no longer in short supply as they were during the pandemic. Increasing availability and PC market bottoming are driving shipments — Jon Peddie Research reports graphics card shipments rose 30% year over year in the third quarter.

Although fourth-quarter data is not yet available, AMD reported that its Radeon GPU sales increased from both the previous quarter and the year-ago period. However, it was not enough to compensate for the slump in sales of semi-order products. AMD’s gaming division’s fourth-quarter revenue was down 17% year over year, and AMD expects to see a significant decline in 2024.

AMD is still in a distant second place in the graphics card market, and this situation is unlikely to change anytime soon. The company had just 17% market share in the third quarter, according to Jon Peddie Research. AMD is a strong competitor at the lower end of the market, but at the high end Nvidia still reigns supreme.

Probably the biggest event in the graphics card market this year intelannounced the next generation Battlemage GPU. Intel entered the discrete graphics card market in late 2022, and although it didn’t gain much traction, it did manage to introduce some solid hardware. Early software issues drove away customers, but the company has frequently updated it to improve performance and stability.

While Intel faces an uphill battle, the presence of a strong third player is not good news for AMD’s graphics business.

2024 has pros and cons

AMD didn’t give much away about its outlook for 2024, saying only that it expects profits to grow faster than sales and that sales for the year will also increase. The data center and PC sector is expected to report strong growth due to increased AI chips, solid demand for EPYC server CPUs, and a recovery in PC demand. On the other hand, the gaming and embedded segment is expected to witness a significant decline.

Partly due to enthusiasm for AI chips, AMD stock more than doubled in 2023. The AI ​​chip business will grow significantly this year, but gaming will be a drag on the company’s growth. AMD stock trades at more than 60 times adjusted earnings, and that rally may not stick as investors weigh AI’s long-term potential against a highly uncertain outlook for 2024. There is sex.