AMD Powers the Heart of the Next Console Generation

Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

AMD (NYSE: AMD) isn't joking when it comes to a turnaround. I expected the company to sit on its hands and have success come to it. Sarcasm aside, I'm surprised that AMD’s good news came from winning a place in the Playstation 4 and the Xbox 720. I'm even more surprised that it will utilize a Radeon GPU instead of something from NVIDIA (NASDAQ: NVDA). As someone who thinks that AMD has massive turnaround potential, while also believing NVIDIA has been stuck where it is for too long, I'm in a bind. NVIDIA is in the PS3, and I'm really very shocked that Radeon will be in both the Playstation 4 and the Xbox 720.

Traditional processors are driving AMD higher. Really?

AMD has positive news, and it's coming from the processor side, which is surprising. I knew the graphics side was doing well, but I wasn't expecting something like this. It's fairly good news, and AMD investors have something to cheer about. It's not really known what this will mean for the company, financially, but it probably won’t hurt. NVIDIA seems to have passed on the PS4 due to margins. Sony wants to keep cost as low as possible, considering that the PS3 was an epic money-loser on hardware, even compared to other consoles.

The development is a good one, but the next console generation is going to be more fractured than ever. I feel like PC gaming might make something of a resurgence. The next-gen consoles will be using off-the-shelf components, which will make them high-end computers. This is done to make it easier on developers, who will find it easy to create games to run on those systems, as well as port them to other systems and the PC. On top of all of this, Valve’s Steam platform will also probably make an appearance on the consoles. Consoles will see increased competition from the Ouya or the Steam Box from Valve.

The PC-like architecture is good news for traditional processors, like those manufactured by AMD, because it means there are more places for them to be used. Devices that are plugged into the wall don't need ARM-based chips because power isn't an issue. I had suggested that AMD might want to call it quits on processors. Instead, it scores a big win in that very area, and the kicker bonus is getting in with the Radeon GPUs. The heart of the next console generation will be powered by AMD, which is a far cry from calling it quits, even if margins are sub-par.

Competitors demurred

I think it's a major broadside against rival Intel (NASDAQ: INTC), because Intel has x86 processors, too. But, it's nowhere to be found with these consoles. I'm not sure if Intel hated the margins and walked away, like NVIDIA, or if AMD just made an offer that couldn’t be refused.

I like some of the stuff NVIDIA is doing, but its stock does not reflect the strength of the business. Project Shield is interesting, but will be facing stiff competition. I still see handheld gaming devices mostly for children, but the bigger money is with older gamers.

Intel is facing a shrinking PC and notebook market. Both companies should be doing everything possible to generate more demand for their parts, and make use of their expensive manufacturing equipment. Intel has its foundry business, which makes chips that others have designed, but the company was built with its own chips.

I'm a dedicated PC gamer, though I do have consoles, and I will probably always own a desktop. I have powered my computers with Intel chips, but I know that PC gamers are a minority. After getting myself a tablet, I questioned whether I would get a notebook ever again. Intel might be making a push to mobile, which would explain why the company let AMD have consoles. I don't think Intel is so focused that it can't try for a spot in consoles. Demand is demand, even if it's at a lower price. The alternative is making less money, and even the foundry business might see shrinking margins over time.

My planned trade

I think I'll drop my consideration of NVIDIA calls. I haven't bought them yet, but I was considering them. I think I will move to something crazier, like January 2015 calls for AMD. I would avoid Intel until I figure what it's going to do, and if it will be successful. I don't think I'm jumping the gun on AMD, since consoles are expected out by the end of the year. In the meantime, there's plenty of time for build-up and additional news regarding sales projections for the consoles and what it means for AMD. If they catch fire, then there will be more production runs and different versions, like the slim editions. AMD will be with the consoles for the entire generation.

One year ago, AMD was over $7. I have over a year and half for AMD to do something more substantial. I'm considering a strike price of $7, because that strikes me as cheap, while still being in the realm of possibilities. On the other hand, even $5-$6 is double, so my reasoning actually suggests buying AMD. The news is good and my target is very high, but it allows me to invest less money. In return, the probability of success is lower. It will be a week or more before I take a position.

Nihar Patel has no position in any stocks mentioned. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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