Sony's PlayStation 5 and Microsoft's Xbox Series X/S models have given Advanced Micro Devices (AMD 0.06%) a big lift. AMD's enterprise, embedded, and semi-custom (EESC) business has gone supersonic since the second half of 2020 when the PS5 and the Xbox Series X/S went into production and were made available for sale, which isn't surprising given that the consoles are powered by AMD's semi-custom chips.
Now AMD's semi-custom business is slated to receive another shot in the arm with the arrival of Valve's Steam Deck, a handheld gaming console that will compete against Nintendo's (NTDOY 0.78%) popular Switch handheld gaming system. Let's see what this new console is all about, and why it could move the needle in a big way for AMD.
Steam Deck marks AMD's entry into a lucrative gaming niche
Created by the popular video game publisher and distributor Valve, the Steam Deck is advertised as an all-in-one portable gaming PC. It allows gamers to play on the go because of its handheld form factor, which makes it different from the PS5 and the Xbox, which need to be plugged into a television or monitor.
As a result, the Steam Deck is being compared to Nintendo's Switch consoles. This comparison bodes well for AMD for two reasons. First, the Steam Deck is powered by AMD's custom accelerated processing unit (APU), comprising a quad-core Zen 2 CPU (central processing unit) and a GPU (graphics processing unit) based on the RDNA2 architecture. Second, the Nintendo Switch had reportedly sold nearly 86 million units through May 2021 since its launch in March 2017. What's more, the Switch has sold an estimated 26 million units in the past year alone.
AMD, however, has missed out on the Switch's massive success, as Nintendo decided to partner with Nvidia to power its handheld console. That partnership has grown stronger, as Nintendo is reportedly going to deploy a more powerful Nvidia chip for this year's Switch console, expected to hit the market during the holiday season.
The Steam Deck, however, gives AMD a solid foot in the door, as it seems capable of challenging the Switch in the handheld gaming console space. Valve has adopted a three-tier pricing strategy for the Steam Deck so that it appeals to a wide audience. The entry-level model with 64 GB storage is priced at $399, while the 256 GB and 512 GB versions equipped with faster memory are priced at $529 and $649, respectively.
There's no doubt that the Switch consoles are cheaper, with the entry-level Switch Lite priced at $199 and the pricier OLED model going up to $349, but the Steam Deck has a few solid advantages. For one, the Steam Deck is reportedly more powerful and can run resource-hungry games given that it is a portable PC. It allows gamers to play titles that are usually reserved for PCs (personal computers) and full-fledged consoles in a handheld form.
The Steam Deck will also benefit from a huge library of games. Valve's online gaming distribution platform Steam, which reportedly had 120 million monthly active players in 2020, has a massive library of over 50,000 games.
The third catalyst for AMD's gaming business
The success of the PS5 and the new Xbox led to a whopping 286% year-over-year increase in AMD's EESC revenue in Q1. The segment generated $1.35 billion in quarterly revenue, accounting for 39% of AMD's total sales.
AMD credited this terrific growth to the "significant demand for the latest generation Sony and Microsoft consoles." After all, Sony and Microsoft have found it difficult to keep up with the unprecedented demand for their latest consoles.
The Steam Deck will add a third catalyst to AMD's semi-custom business, as Valve is going after a huge market with its handheld console, as evident from Nintendo's tremendous success in this space. The device will start shipping in December this year, and it could give AMD's results a nice lift in the second half of 2021 and beyond.
Overall, it wouldn't be surprising to see the EESC business maintain its high growth levels on the back of the success of the PS5 and the Xbox and the solid potential of the Steam Deck, all of which could help AMD maintain its billing as a top growth stock.