Advanced Micro Devices (NASDAQ:AMD) lost ground to arch-rival NVIDIA (NASDAQ:NVDA) in the discrete graphics card market in the second quarter, according to the latest report from Jon Peddie Research.

AMD finished the quarter with just 22% of the discrete GPU (graphics processing unit) market, down significantly from the prior-year period's 32%. NVIDIA regained substantial ground and exited the quarter with a 78% market share. Coronavirus-induced shelter-in-place orders led to an increase in video gaming activity, which in turn powered a spike in graphics card sales, and NVIDIA made the most of it.

Word of this setback for AMD comes at a time when its stock was trading close to all-time highs following the release of a new entry-level graphics card. What's more, it's about to face more heat from NVIDIA when the first of its new Ampere graphics cards hit the market later this month. None of this bodes well for AMD -- its share price had doubled year to date, but the stock is already down over 13% in September as investors digest signs of weakness in the company's business.

Let's see where AMD may be falling short and why the market share loss is a worrying sign.

Graphics cards stacked on top of one another.

Image source: Getty Images.

NVIDIA goes all out to woo gamers with RTX 30 series

AMD lured a substantial chunk of GPU market share away from NVIDIA in the first quarter thanks to competitively priced products such as the Radeon RX 5700 series. But NVIDIA flexed its pricing power and slashed the price of its mid-range RTX 2060. It followed that move with more GPU price cuts in the second quarter in anticipation of the just-announced RTX 30-series graphics cards based on the new Ampere architecture.

By making its offerings more affordable, NVIDIA pulled market share back from AMD, a trend that may continue considering that the RTX 30-series cards are being launched with aggressive pricing. The flagship GeForce RTX 3080 starts at $699, which is the same price at which the previous generation's RTX 2080 was released.

But what's impressive is that NVIDIA claims a 2x jump in performance and a 1.9x improvement in power efficiency as compared to the previous generation's Turing cards. AMD has another reason to worry when it comes to its own RX 5700 graphics cards as NVIDIA's older offerings are likely to be further discounted going forward.

What's more, NVIDIA has announced the RTX 3070 will sell for $499 with claims that it's faster than the RTX 2080 Ti, which previously sold for $1,200. It hasn't announced a successor to the RTX 2060 yet -- that graphics card was originally launched at a price of $349 at CES 2019, three months after the launch of the RTX 2080 and RTX 2070. Based on that schedule, the RTX 3060 might hit the market a few months down the line. That could create even more trouble for AMD if NVIDIA can deliver another significant jump in performance at the same price heading into the holiday season.

AMD now has a mountain to climb

AMD's next-generation RDNA2 GPUs are expected to hit the market soon too. The company has already claimed that its new architecture can deliver a 50% jump in performance-per-watt, but it remains to be seen if that will be enough after NVIDIA's generational leap and promised performance and efficiency gains.

The RDNA2 architecture is a refined version of the existing RDNA architecture. Both are based on a 7-nanometer node, which is probably why the gains AMD is promising aren't as big as those NVIDIA is claiming with its RTX 30 cards. After all, the new RTX 30 cards are built using an 8-nanometer manufacturing process while the RTX 2080 was based on the 12-nanometer Turing architecture.

The shift to a smaller process node is the reason why NVIDIA could deliver the degree of gains it promises with its new cards, whereas the refinement of an existing process may result in limited gains for AMD and make it more difficult for the high-flying chipmaker to compete.

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