The PC graphics card market is still deeply depressed from peak pandemic-era levels. Jon Peddie Research reported this week that overall shipments tumbled 36% year over year in the second quarter. But there was some good news, particularly for Advanced Micro Devices (AMD 2.37%).

Bouncing back

While overall graphics card shipments were down from Q2 2022, shipments increased by about 3% from Q1. That could be a sign that demand is finally bottoming out.

AMD has been hit particularly hard by the graphics card downturn. The company's unit market share had dropped to just 12% in Q1, down by half over the prior year. Part of the problem was a severe decline in PC sales. Global shipments of PCs crashed 29% year over year in Q1 as consumers and businesses saw little reason to upgrade and as the industry worked through excess inventory.

Excess inventory has also been an issue in the graphics card market. AMD has been slowly launching its RX 7000 series graphics cards, but all the while, it's been competing with heavily discounted last-gen RX 6000 graphics cards. Every new graphics card AMD has launched, including the recent RX 7700 XT and RX 7800 XT, has faced stiff competition from older cards still widely available at retail.

This inventory situation finally seems to be improving. "The robustness of the second quarter was better than forecasted as the older inventory seems to be finally cleared out and some board suppliers were offering lower prices," said Jon Peddie.

While AMD's graphics card shipments were down a whopping 48.7% year over year, shipments surged 46.8% from Q1. That huge increase was likely driven by the depletion of last-gen inventory as well as the launch of the budget-minded RX 7600 in May. AMD's unit market share jumped to 17% in Q1, up five percentage points sequentially.

While this represents solid progress for AMD, Q3 may not look as good. AMD expects its gaming segment, which includes graphics cards as well as semi-custom game console chips, to decline sequentially in Q3. Given that the semi-custom business is usually strong in Q3 as holiday inventory gets built up, the company is likely expecting a meaningful decline in graphics revenue in Q3.

Strong data center demand

While the gaming GPU market remains depressed, AMD's data center GPU business is on the rise. The company has largely missed out on the initial boom in demand for AI accelerators, but new products aimed at training and running advanced AI models should drive data center sales significantly higher beginning in the second half of the year.

At a recent investor conference, AMD CEO Lisa Su said that interest in the company's latest data center GPUs aimed at AI workloads had expanded further since the company last reported earnings. Furthermore, that interest had translated into sales, with the company now expecting a "very strong second half of the year" for the data center business.

Much like in the gaming GPU market, AMD is a distant second behind NVIDIA in the data center GPU market. But the size of the opportunity created by the AI boom may be large enough to pull AMD out of its current downturn and offset any further weakness in the gaming business.