Advanced micro devices (NASDAQ: AMD) shares plummeted in 2021. The chip giant’s shares have fallen about 6% in the year to date, outperforming the broad market by a wide margin.
Data by YCharts.
This is surprising, as AMD is about to deliver another year of exceptional growth. The company has dominated Intel in the CPU market and is sitting on favorable trends in the GPU (graphics processing unit) space, where demand is substantially outstripping supply. It can also earn a lot on server processors.
However, these are not the only catalysts for AMD in 2021. The arrival of a new generation of gaming consoles Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE) it is also proving to be a big factor in the company’s favor – something that could help the chip maker exceed its own expectations by supplying chips for both devices.
The new game consoles are witnessing unprecedented demand
The PlayStation 5 and Xbox Series X consoles have set fire to the sales charts in recent months. The PS5, for example, has sold 4.5 million units in less than 50 days since its launch on November 12, according to Sony’s third fiscal quarter 2020 report.
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 larger than the 7.5 million PS4 units that Sony sold from November 2013 to March 2014. According to another estimate, Sony could sell up to eight million new consoles by the end of this month. , although this depends on the company’s ability to purchase more components amid a global chip shortage.
The long-term image also looks bright. The PS5 is expected to register consistently strong sales in the coming years and may eventually reach 200 million units sold according to third party forecasts. The PlayStation 2 has been Sony’s best-selling console so far, with lifetime sales of approximately 159 million units, while the PS4 has sold around 115 million units. The PS5 has a real chance to dethrone its predecessor in the long run, as there are millions of console users in an update window.
Microsoft’s Xbox Series X, on the other hand, is also witnessing strong initial demand. Niko Partners estimates that Microsoft moved 3.5 million units of its new console in November and December last year. The company points out that the number would have been higher if Microsoft had not underestimated demand and produced more consoles. Management says the new Xbox is likely to be out of stock by July this year, with the company reportedly selling all the consoles it made in the last quarter.
All of this indicates that the new gaming hardware is likely to remain in high demand, which bodes well for AMD’s corporate, embedded and semi-personal (EESC) businesses.
Image source: Getty Images.
And that demand created a big tailwind for AMD
AMD’s EESC revenue skyrocketed 176% year over year in the fourth quarter, to $ 1.28 billion (the segment it had delivered registered only 7% revenue growth in the same period last year). AMD management credited an increase in sales of semi-personalized chips for this tremendous performance on the January 26 earnings conference call:
Semi-personalized sales increase year after year and sequentially based on strong demand for the next generation Sony and Microsoft consoles. Our semi-customized SoC sales are rising faster than in the last console cycle and we expect sales to be better than typical seasonality in the first half of this year, based on strong current demand.
This indicates that EESC businesses may continue to experience high growth rates in 2021, and this is great news for AMD, as this segment generated 40% of total revenue in the last quarter. By comparison, EESC businesses accounted for just 22% of net revenue in the fourth quarter of 2019, when the new console cycle was yet to arrive.
Thanks to the rapid expansion of this business, as well as other growth drivers in CPUs and GPUs, the analysts covering AMD’s shares raised their earnings estimates significantly last month.
Data by YCharts.
At the same time, the stock has gotten cheaper because of its retraction. AMD is now trading 42 times behind earnings, well below the 2020 average profit multiple of more than 120. 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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