Advanced Micro Devices (AMD -0.46%) stock has crushed the broader market in the past three years due to rapid growth in the company's revenue and earnings. AMD's performance has been fueled by market share gains against bigger rivals such as Intel (INTC -0.57%) and its presence in popular products like Sony's (SONY 3.20%) PlayStation and Microsoft's (MSFT -0.33%) Xbox consoles.
It won't be surprising to see AMD sustain its impressive momentum in 2022 and remain a top growth stock thanks to the catalysts it is sitting on.
However, investors shouldn't miss a few red flags that could send shares of AMD tumbling. Let's look at three factors that could prove to be AMD's Achilles' heel in 2022.
1. Intel's resurgence could give AMD sleepless nights
The loss of Intel's competitive edge has been one of the biggest factors driving AMD's growth in the past few years. AMD's market share gains in the central processing unit (CPU) space have supercharged the company's revenue and earnings, thanks mainly to an advanced manufacturing process that allowed it to overshadow Chipzilla and gain customer acceptance.
But it looks like Intel is on the road to redemption, as its latest Alder Lake processors are showing signs of taking back share from AMD. Intel's share of sales at German retailer Mindfactory had jumped to 30% in November 2021, which was a record high for the year. Intel had a 23% share of sales at Mindfactory in October 2021, indicating that the launch of its new competitive chips that are comparable to AMD's offerings in terms of the manufacturing process could help it turn the tide.
Intel's new manufacturing process is allowing it to make processors that are not just fast but are also competitively priced when compared to AMD's offerings. Given that Intel is further expected to refine its manufacturing process in 2022 with the Raptor Lake chips and then move to a 7-nanometer process node next year, AMD will have to be on its toes.
AMD has reportedly slashed prices already to ensure the competitiveness of its chips following the launch of the Alder Lake processors. So Intel's resurgence would be bad news for AMD, as the latter has had a terrific run in the CPU space, enjoying a mix of strong volumes and pricing power that could be under threat if Chipzilla continues to execute well.
2. Component shortages could be another challenge
The enterprise, embedded, and semi-custom (EESC) business has been one of the pillars of AMD's outstanding growth since the launch of the latest-generation consoles by Sony and Microsoft. The company's third-quarter revenue from the EESC segment was up a whopping 69% year over year to $1.9 billion, and strong gaming console demand was one of the reasons for this massive jump.
However, it looks like console manufacturers are finding it difficult to source components and make enough devices to meet the robust demand. Nintendo, for instance, slashed the sales forecast of its Switch console for the current fiscal year by 1.5 million units. Similarly, Sony is expected to assemble 15 million units of the PlayStation 5 in the ongoing financial year that's set to end in March 2022, down from the earlier estimate of 16 million units.
Additionally, Sony's manufacturing partners reportedly believe that the company may find it difficult to meet its goal of producing 22.6 million units of the PS5 in the next fiscal year. A similar story seems to be unfolding with Microsoft's latest Xbox consoles, which are expected to be in short supply this year due to chip shortages.
So AMD's sales to Microsoft and Sony may take a hit if the console manufacturers are forced to lower their production this year due to component shortages. This is another potential red flag that AMD investors need to look out for, as its EESC business might lose momentum due to lower console sales.
3. Nvidia is dominating graphics cards
AMD has been unable to make much headway against Nvidia (NVDA 2.58%) in the graphics processing unit (GPU) market over the past year. Nvidia controlled 83% of the discrete graphics cards market in the third quarter of 2021, according to Jon Peddie Research. For comparison, Nvidia had 82% of the discrete GPU market under its control in the fourth quarter of 2020, which means that it hasn't given AMD an inch in this lucrative market.
It is worth noting that AMD was once giving Nvidia a run for its money in the GPU market and controlled a substantially large chunk of this space. However, the launch of Nvidia's Ampere graphics cards in 2020 changed the equation. Those cards brought about huge performance gains at attractive prices. Nvidia is expected to step up its game in 2022 with the launch of its next-generation Ada Lovelace graphics cards that rumors suggest could be twice as fast as the company's current offerings.
So AMD may find it difficult to make any progress against Nvidia in the GPU market, especially considering that the latter seems to have secured a substantial supply of components that could help it corner a bigger chunk of sales in 2022. As it turns out, Nvidia was the only GPU maker to have increased sales in the third quarter of 2021.
Jon Peddie Research estimates $54 billion worth of GPUs will be sold annually by 2025 as compared to $23.6 billion in 2020, and AMD is not in a great position to take advantage thanks to the presence of Nvidia. As a result, AMD may miss out on the sharp increase in GPU sales in 2022 and beyond, and this missed opportunity could eventually weigh on the stock price.