Most investors were focused on Advanced Micro Devices' (AMD 2.37%) AI accelerator business when the company reported its fourth-quarter results on Tuesday. The company expects to sell at least $3.5 billion of data center GPUs in 2024, and it has enough supply to satisfy additional customer demand beyond that number.
While AMD's artificial intelligence chip business is set to boom this year, other parts of the company are likely to struggle. The gaming business, which is comprised of gaming GPUs and semi-custom chips that power the major video game consoles, is going to have a rough year even as AMD expects overall revenue to grow.
Aging game consoles
AMD's semi-custom chips power both Sony's PlayStation 5 and Microsoft's latest Xbox game consoles. The chips combine AMD's Zen 2 CPU architecture and its RDNA 2 graphics architecture into a single package.
These semi-custom deals are a lower-margin affair compared to selling high-powered CPUs and GPUs to PC gamers and power users, but the upside is that the game consoles provide a reliable, multiyear revenue stream. AMD is also likely to power next-generation game consoles since backward compatibility is often a selling point, and sticking with the same architecture is the path of least resistance for the console makers.
Combined, the PS5, Xbox Series X, and Xbox Series S have sold nearly 80 million units since they were launched in 2020. While new game consoles from Sony and Microsoft aren't likely to launch until 2026 or 2027, the current generation is now entering the mature part of the product cycle. The supply constraints of the pandemic are also now a thing of the past, so demand is no longer outstripping supply.
The consequence for AMD of the current game console generation entering its fifth year is that semi-custom revenue is going to weaken substantially going forward. AMD is expecting its gaming revenue to decline by "a significant double-digit percentage" in 2024. In the first quarter, the company expects a 30% sequential decline in revenue as customers work through inventories.
While AMD has a great shot at powering the next generation of game consoles, the semi-custom business is going to deteriorate over the next few years and drag down the gaming segment's results.
A competitive graphics card market
Gaming GPUs are no longer in short supply like they were during the pandemic. Increased availability and the bottoming out of the PC market are driving up shipments -- Jon Peddie Research reported that graphics card shipments rose 30% year over year in the third quarter.
Data isn't yet available for the fourth quarter, but AMD reported that sales of its Radeon GPUs grew both from the previous quarter and from the prior year period. It wasn't enough to offset weak semi-custom sales, though. AMD's gaming segment revenue slumped 17% year over year in the fourth quarter, and AMD expects a meaningful decline in 2024.
AMD remains in a distant second-place position in the graphics card market, and this situation is unlikely to change anytime soon. The company scored a market share of just 17% in the third quarter, according to Jon Peddie Research. AMD is a strong contender in the lower-priced tiers of the market, but at the high end, Nvidia still reigns supreme.
The biggest event in the graphics card market this year will likely be Intel's launch of its next-generation Battlemage GPUs. Intel entered the discrete graphics card market in late 2022, and while it has failed to gain a ton of traction, the company succeeded in launching solid hardware. Early software issues have driven customers away, but the company has used frequent updates to improve performance and stability.
While Intel is facing an uphill battle, a strong third player is not good news for AMD's graphics business.
A mixed bag in 2024
AMD didn't provide much of an outlook for 2024, saying only that it expects earnings to grow faster than revenue and that it expects revenue to grow for the year. The data center and PC segments are expected to report strong growth, driven by the AI chip ramp, solid demand for its EPYC server CPUs, and a rebound in PC demand. Meanwhile, the gaming and embedded segments are expected to suffer significant declines.
Shares of AMD more than doubled in 2023, partly due to enthusiasm over AI chips. While the AI chip business will grow strongly this year, gaming is going to be a drag on the company's growth. With AMD stock trading for over 60 times adjusted earnings, those gains may not stick as investors weigh long-term AI potential against a highly uncertain outlook for 2024.
