Advanced Micro Devices (AMD +5.24%) may not be the dominant player in the graphics processing unit (GPU) market, where rival Nvidia rules the roost, but there is no doubt that the massive opportunity in this space is going to be a key catalyst for the former's growth in the long run.
According to Jon Peddie Research, Nvidia controlled 78% of the market for discrete GPUs used in gaming personal computers (PCs) and laptops in the first quarter of the year. Similarly, Nvidia also dominates the market for data center graphics cards with an estimated market share of over 80%, according to market research firm Omdia.
AMD, however, has shown signs that it could win big from the PC and data center GPU markets, which are two green flags that investors may want to take a closer look at.
NASDAQ: AMD
Key Data Points
AMD's gaming GPU sales are heading higher
AMD CEO Lisa Su pointed out on the company's May earnings conference call that sales of the company's desktop GPUs had nearly doubled on a year-over-year basis. Su added that the first notebooks featuring its new Radeon 6000 mobile graphics cards were launched last quarter, and their sales should start ramping up as the year progresses.
AMD generated $2.8 billion in revenue from its computing and graphics segment last quarter, an increase of 33% year over year. The company pointed out that an increase in the average selling price of GPUs on account of an increase in sales of high-end PC graphics cards played an important role in this segment's growth last quarter. AMD witnessed record sales of desktop GPUs last quarter, and it wouldn't be surprising to see the company sustain its momentum as its product roadmap indicates.
AMD revealed its gaming GPU roadmap at its recently held financial analyst day, pointing out that the company's RDNA 3 graphics cards, based on a 5-nanometer (nm) manufacturing process, will soon hit the market. It is estimated that AMD's 5nm cards could be launched this year, followed by the RDNA 4 architecture in 2024 that's expected to be based on a 3nm manufacturing process. Cards based on a smaller manufacturing node are more efficient since they pack in more transistors into a smaller area -- which allows them to carry out more calculations while generating less heat -- and are also cheaper to manufacture.
This indicates that AMD will be hot on the heels of Nvidia, whose RTX 40 series cards -- based on a 5nm manufacturing process -- are set to be released later this year as well. More importantly, AMD claims that its new gaming cards could deliver at least 50% performance gains over the current offerings.
On the other hand, AMD's notebook GPU sales should also pick up the pace, as its latest Radeon RX 6000 series processors have scored three times as many design wins as compared to their predecessors. This should ideally lead to a sharp increase in the number of laptops and notebooks featuring AMD graphics cards as more OEMs (original equipment manufacturers) have selected its chips to power their offerings.
All of this indicates that AMD is setting itself up to corner a bigger share of the gaming GPU market, where Nvidia is currently the leading player. Given that sales of discrete GPUs could hit $54 billion in 2025, climbing from $23 billion in 2020, AMD's growth in this market would be a solid green flag for the company's future.
The data center GPU business should get better
We have already seen that Nvidia dominates the data center GPU market, but AMD has been gaining some traction in this business as well. AMD enjoyed solid growth in the data center GPU business last year thanks to the increasing adoption of its accelerators by high-performance computing providers.
AMD closed 2021 with multiple wins for its data center accelerators that were selected by supercomputer operators. The chipmaker says that the trend of winning business for its data center graphics cards at cloud customers has continued in 2022. AMD is looking to push the envelope further in the data center graphics cards space, as indicated by the company's product roadmap.
It plans to launch its next-generation data center GPUs based on a 5nm manufacturing process next year, which would be an upgrade over the current-generation 6nm chips. AMD estimates that the shift to the new CDNA 3 data center GPU architecture could deliver 5x performance/watt gains over the current chips in tackling artificial intelligence (AI) workloads. Put simply, AMD's upcoming data center chips are expected to carry significantly more computational power for every watt of electricity that they consume.
AMD estimates that the data center GPU market could help unlock a $64 billion addressable market for the company in the long run. So the company is scratching the surface of a massive opportunity, as its combined data center GPU and CPU (central processing unit) revenue reportedly stood at $3.78 billion last year.
The secular growth of the data center GPU market along with AMD's product development moves should help it corner a nice chunk of the opportunity on offer, which should give a nice lift to the company's revenue and earnings and help this semiconductor stock deliver a healthy upside in the long run.
