AMD (NASDAQ:AMD) mounted a stunning comeback over the past 18 months, surging from less than $2 a share last February to about $13 today. The chipmaker repeatedly defied the bears -- who claimed that it would be crushed between Intel (NASDAQ:INTC) and NVIDIA (NASDAQ:NVDA) -- by pivoting toward SoCs for gaming consoles and launching new CPUs and GPUs that addressed previous shortcomings.
However, AMD's rally came to a halt in late July, even after its second quarter revenue and earnings crushed analyst estimates. Part of that decline can be attributed to Barclays' claim that the stock could plummet 30% as the cryptocurrency craze driving its GPU sales dies down and it cedes GPU market share to NVIDIA. Let's examine the bearish arguments against AMD, and see if investors should be concerned.
The future of AMD's GPU business
AMD bulls believe that its new Vega chips will counter NVIDIA's current-gen Pascal chips for several months until NVIDIA's next-gen Volta GPUs arrive. Prior to their recent introduction, industry watchers expected the Vega chips to offer performance comparable to that of high-end Pascal chips at lower prices.
However, AMD's new Radeon RX 64 and 56 desktop GPUs respectively cost $399 and $499, which is merely comparable to NVIDIA's GTX 1070 and 1080 GPUs, which respectively cost $379 and $499. That's why NVIDIA doesn't seem worried about Vega at all. In a recent earnings call, NVIDIA CEO Jensen Huang declared that the Pascal would be "unbeatable" for the "foreseeable future".
That's troubling for AMD, which was already overshadowed in the low-end market by NVIDIA over the past year and by cheaper GeForce cards like the GT 1030, GTX 1050, and GTX 1050 Ti -- which cost between $70 to $140. As a result, AMD bulls have started touting the effectiveness of AMD GPUs for cryptocurrency mining -- but as I mentioned in a previous article, some tests indicate that NVIDIA chips can actually perform mining tasks at more power-efficient levels than AMD ones.
This all puts AMD in a tough spot. If the new Radeon Vega chips don't dent Pascal's market share, they could be steamrolled by NVIDIA's Volta chips next year. And if the cryptocurrency craze fades, we could see a big drop in AMD's GPU revenues.
The future of AMD's CPU business
AMD's CPU business fared better with the recent introduction of Ryzen, which offers performance comparable to that of Intel's current-gen 14nm Kaby Lake chips for about half the price. It also captivated industry watchers with its new high-end Eypc server chips.
Unfortunately, it's only a matter of time before Intel strikes back with its final 14nm refresh (Coffee Lake this month) and its first 10nm chip (Cannonlake in early 2018). AMD plans to launch a successor to Ryzen in early 2018 to counter those newer chips, but it's unclear if it can still match Intel's performance at lower prices.
If AMD merely matches Intel's prices with comparable chips, as the Radeon Vega did with NVIDIA's GPUs, it could be marginalized by Intel's superior brand appeal, hardware partnerships, and marketing budget. Meanwhile, Barclays analyst Blayne Curtis believes that the Epyc "is seeing little traction" in the data center market, which Intel dominates with a 99% market share.
The initial demand for AMD's Ryzen has been encouraging, but investors should realize that growth could abruptly stop if Intel brings out the big guns.
The future of gaming consoles
AMD's sales of custom SoCs for Sony's PS4 and Microsoft's Xbox One turned its EESC (Enterprise, Embedded, and Semi-Custom) unit into a pillar of growth for the company. The recently refreshed and upgraded versions of those consoles will also sport AMD chips.
However, investors should note that Nintendo's hot new hybrid console, the Switch, actually uses Nvidia's Tegra SoC. If the Switch's success prompts Sony and Microsoft to launch similar hybrid consoles, AMD's future in the console market is hardly guaranteed.
Moreover, the Switch bears similarities to NVIDIA's own Shield gaming tablet, which can stream games from higher-end PCs. This indicates that if locally or cloud-streamed games eventually replace console-based ones, NVIDIA's Tegra chips could adequately play games powered remotely by higher-powered desktop GPUs.
But don't bet against AMD just yet...
AMD's growth isn't a "sure thing", but it probably won't crash back to the single digits. CEO Lisa Su made remarkable progress turning around the chipmaker, so I assume she still has strategies to counter NVIDIA and Intel's next-gen chips. Therefore, I wouldn't bet against AMD, but I'd think long and hard about these potential challenges before buying the stock.