AMD In its recent fourth-quarter results, Advanced Micro Devices (AMD) showcased a promising future in the AI accelerator business, with expectations to sell a substantial $3.5 billion worth of data center GPUs in 2024. However, amidst this positive outlook, challenges loom over other segments of the company, particularly the gaming business.
AI accelerator boom and data center dominance
AMD’s foray into AI accelerator chips has generated significant buzz, with the company poised to capitalize on the growing demand for artificial intelligence capabilities. The projection of selling over $3.5 billion in data center GPUs in 2024 reflects the strong market position AMD has established in this domain. The company’s assurance of having ample supply to meet additional customer demands further solidifies its standing in the data center market.
While the AI chip business is set to thrive, the gaming business, encompassing gaming GPUs and semi-custom chips for major gaming consoles, faces a challenging year. The semi-custom chips, powering consoles like Sony’s PlayStation 5 and Microsoft’s latest Xbox, bring in reliable revenue but at lower margins compared to high-powered CPUs and GPUs for PCs. With the current console generation entering its mature phase and supply constraints resolved, AMD anticipates a significant decline in gaming revenue by a “significant double-digit percentage” in 2024.
Semi-custom challenges impact gaming revenue
The consequence of the current console generation’s aging is a foreseen deterioration of AMD’s semi-custom revenue, exerting downward pressure on the overall gaming segment’s financial results. Despite the success of the PlayStation 5, Xbox Series X, and Xbox Series S, which have collectively sold nearly 80 million units since 2020, the impending decline in semi-custom revenue is an undeniable headwind for AMD’s gaming business.
In the graphics card market, AMD finds itself in a distant second place, with a market share of 17% in the third quarter. While gaming GPU availability has improved and shipments have increased, AMD’s gaming segment revenue still experienced a 17% year-over-year slump in the fourth quarter. The company’s position in the high-end graphics card market remains challenging, with Nvidia maintaining its dominance.
Intel’s entry adds competition
A notable development in the graphics card market is Intel’s entry with its next-generation Battlemage GPUs. Despite facing challenges initially, Intel has managed to launch competitive hardware, and frequent updates have addressed early software issues. As a strong third player, Intel’s presence in the market poses a potential threat to AMD’s graphics business.
While AMD’s outlook for 2024 remains somewhat ambiguous, the company anticipates faster earnings growth than revenue growth. Strong performances are expected from the data center and PC segments, driven by the AI chip ramp, robust demand for EPYC server CPUs, and a rebound in PC demand. However, the gaming and embedded segments are forecasted to experience significant declines, with a 30% sequential decline in revenue expected in the first quarter.
Despite AMD’s stock experiencing substantial gains in 2023 and trading at over 60 times adjusted earnings, investors face a conundrum. Enthusiasm over the AI chip business contrasts with concerns about the uncertain gaming outlook for 2024. As investors weigh the long-term AI potential against the gaming segment’s challenges, the stock’s sustained gains may face scrutiny.
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