Advanced Micro Devices' (NASDAQ:AMD) third-quarter earnings report -- set for release on Tuesday -- is going to be a crucial one. Investors had given AMD the benefit of the doubt nearly three months ago when the chipmaker slashed its full-year guidance. The stock bounced back and managed to maintain its high-flying run on the market.

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But Wall Street might not be as generous when AMD releases its next report. The company needs to knock it out of the park with solid numbers and a strong outlook to justify its current rich valuation. The good news: AMD can do just that thanks to its recent product launches and market share gains.

Why AMD can surpass expectations

Wall Street expects AMD to deliver 9.4% annualized revenue growth in the third quarter to $1.81 billion. Earnings per share are expected to increase from $0.13 in the prior-year period to $0.18 in the third quarter of 2019. These numbers are right in line with the midpoint of the company's guidance range.

However, AMD is quite capable of springing a surprise. The company has already said that strong demand for its Ryzen central processing units (CPUs), EPYC server processors, and graphics cards will drive the year-over-year gains. But those gains could be larger than expected given the recent trends in the CPU and graphics card markets.

Jon Peddie Research reports that AMD's share of the discrete graphics processing unit (GPU) market had shot up to 32.1% in the second quarter of 2019 from 22.7% in the first quarter. The report adds that AMD's second-quarter GPU shipments had jumped 9.8% sequentially, while archrival NVIDIA didn't see any growth.

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In fact, AMD's GPU shipments outpaced NVIDIA's for the first time in five years. The market share gain was reflected in AMD's second-quarter results: Its GPU revenue was up in the double digits on a sequential basis.

AMD can replicate that performance in the third quarter thanks to its recent product launches. In July, AMD announced two new graphics cards -- the RX 5700 and the RX 5700 XT -- that reportedly outperform their NVIDIA counterparts on performance and retail at identical price points.

In fact, the RX 5700 XT can punch above its weight class by giving the pricier NVIDIA RTX 2070 Super a run for its money. NVIDIA's offering costs 25% more than the AMD card, but it has a performance advantage of just 6.9%, according to Tom's Hardware.

So AMD's strategy of delivering a mix of value and performance could have helped the company gain more ground in the graphics card market against NVIDIA in the third quarter. A similar scenario could unfold in the CPU market as well, where AMD has been taking away substantial market share from Intel.

The PC CPU and the PC GPU businesses are a part of AMD's computing and graphics segment that accounts for more than 61% of the total revenue. So an improved performance from this segment could help the chipmaker trump analysts' third-quarter expectations, though that alone won't be enough to keep investors in good spirits.

The market expects bumper guidance

The real challenge for AMD will be the outlook. Analyst estimates compiled by Yahoo! Finance expect AMD's top line to grow a whopping 51% year over year in the December quarter. That seems like a tall order at first, as the company had reduced its full-year guidance in July, citing slow sales of semi-custom chips that are used in gaming consoles.

So the question is, does AMD have enough catalysts to offset that headwind?

That question has a tricky answer. Sales of current-generation gaming consoles such as Sony's PlayStation 4 could cool off during the holiday season because new devices are set to be released next year. So AMD could continue to face weakness in the semi-custom business.

But at the same time, it can offset that weakness with the market share gains in the CPU and GPU segments. Data compiled by CPU Benchmarks tell us that AMD ended the third quarter of 2019 with more than 31% of the CPU market under its control, up from 23% in the second quarter.

Investors should take those gains with a pinch of salt since there are quite a few limitations to the study carried out by CPU Benchmarks. For instance, it counts the number of CPUs in use instead of those purchased, so only those computers that have used the benchmark become a part of the study.

Still, the massive increase in AMD's market share is indicative of the fact that its new Ryzen chips, based on the 7-nanometer node, are proving to be a hit with customers. Meanwhile, AMD's graphics cards business could get a nice shot in the arm in the fourth quarter on the back of new cards that will follow the company's tried-and-tested strategy of delivering solid performance at an affordable price.

In all, AMD seems to have enough catalysts in the bag to help it deliver impressive guidance. But it remains to be seen if the numbers will be good enough to satisfy Wall Street's expectations.