Will AMD's Google Stadia Win Pose a Threat to NVIDIA GPU Moat?

Zacks Equity Research

Advanced Micro Devices AMD customized Radeon datacenter GPUs is supporting Alphabet GOOGL division Google’s upcoming cloud-based video game streaming service, Stadia. We believe this to be a game changer for AMD as it provides the company considerable exposure in the rapidly evolving cloud gaming market.

Moreover, the selection of AMD GPU by Google, one of the prominent hyperscalers, is expected to challenge NVIDIA’s NVDA dominance in the GPU as well as datacenter market.

Further, AMD’s software tools will also be utilized in the Linux and open-source Vulkan API (or application program interface) based Google Stadia platform. This will assist software developers to provide immersive game streaming experience to end users.

Notably, AMD shares were up almost 12% to close at $26 on Mar 19. Notably, shares have returned 134% in the past year, against the industry’s decline of 11.8%. Meanwhile, shares of NVIDIA’s have plunged 29.6%.

What’s Favoring Adoption of AMD’s Radeon GPUs?

Streaming of graphics-intensive games on the cloud in real time requires high-performance processing functionalities which reduce latency and accelerate game performance in a securely managed infrastructure. This is where AMD’s Radeon GPUs come in handy.

In fact, AMD’s datacenter GPUs customized for Stadia is loaded with robust feature, including HBM2 or second-generation high bandwidth memory with ECC (or Error Correcting Code) support.

Moreover, AMD’s tailor-made GPUs for Stadia feature hardware-based virtualization solution with SR-IOV (or single root input/output virtualization) standard technology.

These combined features amplify the capabilities of AMD graphics architecture, enabling developers to scale gaming services from PCs and consoles to even cloud gaming platforms.

Furthermore, AMD Radeon GPUs can be optimized with AMD’s robust software tools, which comprise open-source based Linux drivers. The drivers support AMD Radeon GPU Profiler (“RGP”), which provides developers with specifications to run workloads on AMD’s GPUs efficiently.

AMD’s Portfolio Strength is Noteworthy

AMD has been securing notable customer wins on the back of its strength in cloud-based high-performance GPU portfolio. The company is leaving no stone unturned to strengthen its GPU portfolio with new capabilities in a bid to provide gamers with superior graphic performance and high-quality visual experiences.

For instance, at CES 2019, the company unveiled its new Radeon Software Adrenalin 2019 Edition. This updated version will feature the WattMan technology and be based on the AMD RadeonGPUs.

AMD also launched the much-awaited next generation 7-nanometer (nm) Radeon Vega GPU, AMD Radeon VII. Priced at $699, Radeon VII is expected to aid AMD in penetrating the high-end graphics card market.

The diversification of GPU portfolio and enhancing it with software tools is anticipated to cushion AMD from sluggish GPU demand owing to cryptocurrency miners.

Additionally, with the latest Google Stadia win, we believe AMD is well poised to capitalize on the growing cloud gaming domain with major hyperscale cloud service providers (CSPs) like Microsoft MSFT and, Amazon AMZN. These companies are planning to expand their presence in the datacenter as well as cloud-based gaming market.

Per latest IHS Markit data, “consumer spending on cloud gaming content subscriptions reached $234 million in 2018 and is forecast to grow to $1.5 billion by 2023.” This presents significant growth opportunity for AMD.

Reportedly, AMD is also working on custom GPUs which are expected to be utilized in the forthcoming gaming consoles from Sony SNE and Microsoft. Notably, consoles of both these companies dominate the console market. The completion of these developments is likely to limit NVIDIA’s market share expansion in GPU shipments. Notably, NVIDIA’s Tegra GPUs are deployed in Nintendo NTDOY switch.

Should NVIDIA be Concerned?

AMD’s expanding GPU portfolio catering to every price points is well-poised to threaten NVIDIA’s dominance. Despite its late entry, AMD has been successful in creating a noteworthy position in datacenter GPU market. The company started small, targeting the low-end segment and gradually created a foothold for itself, which is commendable.

Notably, NVIDIA has always generated substantial revenues from its GPU cards on account of the significantly higher functionality. However, it has been hit with a deteriorating trend in its gaming business over the last two quarters. Demand from gamers failed to perk up rapidly to offset the tepid cryptocurrency-related losses, leading to higher-than-expected inventory level of its midrange Pascal gaming cards.

Nevertheless, it would be foolish to ignore the portfolio strength of NVIDIA. NVIDIA recently introduced a new gaming GPU, modestly priced from $270 onward, GeForce GTX 1660 Ti, which is expected to boost performance and power efficiency to enhance the experience of playing today’s most popular games.

Further, NVIDIA recently announced at the 2019 GTC Conference that its Tesla T4 GPUs will be utilized by Amazon Web Services. In November 2018, only a couple of months after its introduction, NVIDIA announced T4 to be the fastest selling GPU in the cloud space with several tech giants unveiling products and services based on it. In fact, Baidu, Tencent, JD.com and iFLYTEK, all started using T4 to expand and ramp up the respective hyperscale datacenters.

As gaming and datacenter markets evolve, it would be interesting to see how GPU war intensifies between AMD and NVIDIA.

Zacks Rank

Currently, AMD and Alphabet both carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, NVIDIA has a Zacks Rank #5 (Strong Sell).

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