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Which Segment Will Drive AMD’s Growth in Fiscal 4Q15?

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AMD’s business segments

In the last part of the series, we saw that Advanced Micro Devices (AMD) expects its revenue to fall in fiscal 4Q15. Industry data show a similar picture for overall semiconductor chip sales in calendar 4Q15. AMD operates through two business segments—CG (Computing and Graphics) and EESC (Enterprise, Embedded and Semi-Custom). Not all of the businesses reported growth. As a result, it’s important to know which areas will drive the company’s future growth and which areas will stall the growth.

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Business segment’s performance in fiscal 3Q15

Over the past three years, the company has been transitioning away from CG to EESC. CG is dominated by Intel (INTC). In fiscal 3Q15, the company’s revenue from CG fell by 46% YoY (year-over-year). The revenue from EESC fell by 2% YoY. The operating income of $84 million from EESC was offset by a $181 million loss from CG in fiscal 3Q15.

Key growth drivers

The gaming console market is the key growth driver for AMD. It has an upper hand over NVIDIA (NVDA) in this segment through its application processing unit. AMD supplies chips to Sony’s PlayStation 4 and Microsoft’s (MSFT) Xbox. It’s rumored that it will secure the contract for Nintendo.

The company is also creating technology to gain from the $110 billion VR/AR (virtual and augmented reality) market. Goldman Sachs stated that “we believe VR/AR has the potential to spawn a multibillion-dollar industry and possibly be as game changing as the advent of the PC.” This would make NVIDIA and AMD key players. They would have the first mover advantage in VR/AR technology.

Products with strong growth potential

Looking from the product front, GPUs (graphic processing units) performed better than CPUs (central processing units) for AMD in fiscal 3Q15. The company formed a separate Radeon Technologies Group to focus on GPUs. The new group released three new GPUs in mid-2015—Radeon R9 Fury X, Fury, and Nano. This helped AMD regain some lost share in the discrete GPU market.

According to Jon Peddie Research, the company’s share in the GPU market rose to 18.8% in 3Q15 from 18% in 2Q15. NVIDIA’s share fell to 81.1% from 81.9% during the same period. AMD’s share will likely grow more.

You can gain exposure in the semiconductor industry through the exclusive Semiconductor ETF (SMH). It has exposure in 26 stocks. It has a 19.3% exposure in Intel and 2.8% in NVIDIA.

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