Advanced Micro Devices (AMD -0.17%) is mostly known for supplying its chips to the personal computer (PC), data center, and gaming console markets, but the chipmaker is gaining traction in another market that could substantially boost its business in the long run.

Electric vehicle (EV) specialist Tesla (TSLA -2.44%) has switched to AMD's chips for its new Model Y vehicles in China, according to Electrek, which is known for its coverage of Tesla and the EV industry. Let's see why this could be a big deal and what this means for AMD's prospects in the automotive industry.

Simulated image of a connected car cockpit.

Image source: Getty Images

AMD has expanded its presence at Tesla

AMD revealed in May this year that its chips are powering the infotainment systems in the Tesla Model S and Model X vehicles. AMD equipped these vehicles with a semi-custom chip comprising of a Ryzen embedded accelerated processing unit (APU) and a graphics card based on the RDNA 2 architecture that's powerful enough to run popular games such as Cyberpunk 2077 and The Witcher 3.

You may be wondering who would be sitting inside their Teslas and playing video games, but it is worth noting that this is a potential business model that automakers have been testing for the past few years. According to a blog by Mercedes-Benz parent Daimler AG that was written in September 2019, in-car gaming could turn out to be a viable business model in the long run. That's because gaming provides interactive entertainment to the passengers who are likely to look for ways of keeping themselves engaged while being driven around in an autonomous vehicle.

So, it wasn't surprising to see Tesla turn to AMD to power its in-car infotainment system given the chipmaker's chops in the video gaming industry. Tesla has earlier used both Nvidia and Intel's chips in its cars, so AMD has displaced its bigger rivals at this key automaker.

Here's how the big picture looks 

AMD's partnership with Tesla could present a terrific revenue opportunity in several ways. First, Tesla is on track to produce 1 million vehicles annually. The company had reportedly achieved an annualized production rate of a million vehicles by the end of the third quarter from just two factories in California and Shanghai. With two more factories set to open up in Berlin and Texas, the company seems to be on track to increase output.

With AMD's chips now being deployed in another Tesla vehicle, the chipmaker is likely to generate more revenue from its automotive segment. Additionally, the Tesla partnership could encourage more automakers to go for AMD's automotive offerings. That won't be surprising, since AMD's automotive solutions cover a wide range of applications ranging from a digital cockpit to artificial intelligence-enabled features such as driver alertness monitoring and natural-language voice control.

In all, AMD's automotive portfolio gives it access to a massive market that's going to be worth billions of dollars in the long run. The digital cockpit market, for instance, is expected to be worth $36 billion by 2025 as compared to $14.7 billion in 2018 as per a third-party research report. The automotive infotainment market, on the other hand, could jump from $25 billion in revenue last year to nearly $43 billion by 2027.

As such, the automotive market could turn out to be another catalyst for AMD in the long run and add to the already-impressive growth that it is expected to deliver thanks to the gaming and data center markets. Analysts estimate that AMD's earnings will increase at an annual pace of 35% for the next five years, but investors can expect this high-growth company to do even better as new growth drivers such as automotive come into play.