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1 Big Reason AMD's Hot Streak Will Continue in 2020

Advanced Micro Devices (NASDAQ: AMD) stock has more than doubled so far this year. But there's no need to worry if you've missed this terrific run as AMD is built for more upside.

The strong growth of AMD's computing and graphics business has been critical to the stock's impressive rise. However, there's one area where the chipmaker is still coming up short: the enterprise, embedded, and semi-custom business segment (EESC).

AMD's EESC revenue was down 27% in the third quarter. Lower sales of the company's semi-custom chips that are used in gaming consoles hurt this segment considerably last quarter, erasing the gains delivered by AMD's EPYC server processors. Operating income also took a hit, falling 29% year over year.

But the good news is that the EESC segment could make a major comeback in 2020.

Person holding a console game controller.

Image source: Getty Images.

AMD's semi-custom sales should take off in 2020

The decline in AMD's semi-custom revenue last quarter wasn't surprising. Shipments of semi-custom chips to Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE) dropped as both companies are now prepping for their next-generation gaming consoles.

Demand for the current generation of consoles is already waning. Not surprisingly, AMD expects further weakness in the semi-custom business this quarter as the PlayStation 4 and the Xbox One enter the last year of their lifecycles. But the good news for AMD investors is that the chipmaker has already secured its spot in Sony's and Microsoft's next-gen consoles.

This opens up a huge market for AMD. Sony has sold nearly 103 million units of the PS4 over the console's lifespan, which has made it the second-best-selling gaming console of all time. Third-party estimates suggest that Microsoft has moved over 44 million units of the Xbox One console. It won't be surprising if the next-generation consoles surpass those sales figures thanks to enhancements Sony and Microsoft have promised.

The next PlayStation console will reportedly support 8K graphics, 3D audio, and a solid-state drive (SSD) for storage. What's more, it is expected to be backward-compatible with PS4 titles and even support ray-tracing technology. Microsoft is also promising something similar in its next Xbox console.

AMD's third-generation, eight-core Ryzen central processing unit is expected to power the consoles, along with a powerful graphics card. This indicates that the chipmaker has a huge opportunity to sell more processors and graphics cards next year once the new consoles go into production in time for 2020's holiday season.

More importantly, the solid specs promised by both Microsoft and Sony could spark a strong upgrade cycle.

A console upgrade cycle could drive huge growth

According to Jon Peddie Research, the installed base of the PlayStation 4, the Xbox 360, and the Xbox One stood at 235.2 million units last year. That number is expected to grow to 260 million units this year.

The installed base of the Xbox 360 alone stands at just over 100 million units, and that device was discontinued in 2016. It would be relatively safe to assume that the majority of these Xbox 360 owners will be itching to upgrade to a Sony or a Microsoft console next year. In either case, AMD will be the winner.

Cumulative Shipments of Console Graphics Cards (in Million Units)
Console 2015 2016 2017 2018 2019 (Estimate)
PS4 37.4 57.9 77.3 95.2 112.6
Xbox 360 96.6 99.6 100.6 100.6 100.6
Xbox One 17 24.2 32.3 39.3 46.8
Total 151 181.7 210.2 235.1 260

Data source: Jon Peddie research. 

The table above clearly shows that the installed base of AMD-powered consoles was at more than 150 million units in 2015. All of this indicates that the next-gen consoles could witness a huge spurt in shipments, which would boost AMD's top and bottom lines.

So investors should ignore the near-term weakness in AMD's semi-custom business as the segment is gearing up for a major turnaround in 2020, which could go a long way in making AMD a top growth stock once again.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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