3 Reasons the Game’s Not Over for AMD

After this week’s action in Advanced Micro Devices (AMD), which moved from $3.70 to $4.30 in a matter of days, some traders may think it’s time to short AMD again.

I took a quick gain in AMD for Global Trend Trader subscribers, but now I think things are playing out for a re-entry move. Here’s why.

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#1 Global video game revenues continue to post solid year-over-year growth, driven by sales in developing economies like China.

With practically every application on the planet going mobile, it’s no surprise that mobile gaming is forecasted to nearly double by 2017.

Source: Digi-Capital.com

The interesting thing here is that mobile games are a feeder to higher-margin consoles, not a killer as some think.

The chart from research firm Digi-Capital shows leading gaming companies’ position within the "mobile — PC/console" and the "hard core — casual" spectrum.

While there are 247 mobile gaming companies in the U.S. alone, each generating about $1 million in revenue per year, game consoles still account for 42% of the global video game market.

#2 The big margins and deep markets are currently in consoles.

The gaming console market is dominated by Microsoft (MSFT) and Sony (SNE), both of which buy microchips from AMD.

New consoles from both Sony and Microsoft are doing remarkably well. Improved performance is driving the strong consumer acceptance of Xbox One and PlayStation 4, delivering a better gaming experience along with functionality to integrate the consoles with other digital media.

While it’s a two-car race, the current leader is Sony. PS4 sales are climbing steadily, hitting 7 million units sold, up from 6 million a month ago.

Microsoft is staying in the game with software. With the help of Respawn Entertainment and Electronic Arts (EA), "Titanfall" for Xbox One was the number one selling game in March according to NPD Group.

Overall for Xbox, Microsoft reported that the average Xbox user spent 5 hours playing on the console and that over 1 billion hours have been spent to date in play. Users have purchased 2.9 game titles on average.

#3 New content further stimulates gaming console excitement.

Microsoft reported that the average Xbox One user spent 5 hours playing on the console and the over 1 billion hours have been spent to date in play; users have purchased 2.9 titles.

Titanfall is exclusive to Microsoft’s Xbox One and PC users and shows every indication of being a home run. Users report being thrilled with the game.

Since its March 11 release, Titanfall became the No. 1 selling game in the U.S. last month and certainly boosted Xbox sales, although Xbox One console sales were still below PS4 for the period.

With a superior gaming title like this, Microsoft may begin to counter Sony’s claim of "gamer preference" for PS4 and improve its brand position.

Hardware producers Sony and Microsoft depend on game software developers to survive in the marketplace. The successful partnership with Respawn and EA gives Microsoft a competitive advantage — and the impact on Electronic Arts (EA) could be even more dramatic.

The Titanfall homerun should drive growth, profits and valuation for the company. As the following chart illustrates, EA may be beginning to respond to the Titanfall reviews and results.

Digi-Capital forecasts that the mobile and online gaming business will almost double from 2013 to 2017 to about $60 billion in annual revenue. At the same time the overall global gaming market will grow to about $100 billion with modest growth in hardware/consoles.

In short, the idea that console games are dead is not playing out in the marketplace. AMD will be one of the real winners here as more gamers drive demand for its microchips.

I’m watching the gaming sector closely in Global Trend Trader as we follow the convergence of technology and entertainment. I think this will be a multi-year opportunity with thousands of interesting names.

That’s my take on it.

Rudy

P.S. My colleague James DiGeorgia just closed out his 11th winning trade this year. Watch this presentation and discover how he did it!