Advanced Micro Devices' (AMD, Financial) Ryzen is finally here.
Surprisingly, the stock price is in the red amid several reports regarding the poor gaming performance. The stock was down 7.09% on the day. Ryzen’s CPU performance stood out as compared to Intel’s (INTC, Financial) pricier and more power-hungry counterparts, but the unusual gaming performance is taking its toll on the stock price. Advanced Micro Devices clarified that, as the company was out of the scene in the high-end CPU market, the games aren't optimized to work with the processors, and patches don’t come overnight.
Credit: dailytech
Gaming performance: A threat for Ryzen’s desktop sales?
If the processor won’t be able to beat or match the competitor's offerings even after the patches come in, it would affect Advanced Micro Devices' desktop sales. Desktop sales are fueled by gamers. JP Research notes that that the average PC sale is increasingly motivated by the video game use model, which is important to understand in a stagnant or declining overall PC market. Therefore, lack of Ryzen's gaming performance can hit Advanced Micro Devices materially.
Performance differences disappear at higher resolutions, and high-end gamers usually go for 4K gaming. The patches may solve the problem going forward. Therefore, the threat of gaming-related loss is not very high.
Intel’s bag of marketing tricks
The more relevant threat to Advanced Micro Devices' Ryzen success is Intel’s anti-competitive practices that were witnessed in the past. Ryzen is definitely up there with premium processors beating Intel in pricing and power. But the threat of Intel using its power to abuse the market is also real. Intel used unethical marketing strategies including incentive rebates, exclusivity clauses and P.R. tricks to sabotage Advanced Micro Devices' Athlon efforts in the past. Advanced Micro Devices notes in its 10-K,
"Intel’s market share, margins and significant financial resources enable it to market its products aggressively, to target our customers and our channel partners with special incentives and to influence customers who do business with us. These aggressive activities have in the past resulted in lower unit sales and a lower average selling price for many of our products and adversely affected our margins and profitability."
Further, the European Commission’s (EC)Â ruling on Intel documented monetary incentivization of OEMs like Acer (FRA:AC5G, Financial), Dell (DELL, Financial), HP (HPQ, Financial) and Lenovo (HKSE:00992, Financial) to buy all or almost all their CPUs from Intel. The company paid computer manufacturers to halt or delay the launch of Advanced Micro Devices hardware, including Dell, Acer, Lenovo and NEC (FRA:NEC1, Financial).
The Federal Trade Commission’s ruling was no different as it noted rebates and bribes of sorts to deter competition. The EC imposed a $1.45 billion fine on Intel. Intel will happily pay this fine when multibillion-dollar sales are in question. Therefore, the risk of anti-competitive behavior is in the cards, which can hurt Advanced Micro Devices' turnaround story.
10nm delay – some breathing space for Ryzen
On the flip side, the good news for Advanced Micro Devices is the delay in the new node – i.e., 10nm – from Intel. Coffee Lake, Intel's eighth-generation core CPUs, will be based on 14nm. Although Intel is promising 10% to 15% performance increases, it remains to be seen. Further, BlueFin Research Partners analyst Steve Mullane notes that Intel is “struggling with defect/yield issues with this process for high volume manufacturing (HVM) release and have not locked down the complete process of records (PORs) to date."
This can push the launch of 10nm parts to the first quarter of 2018. Regarding Coffee Lake, competing with Advanced Micro Devices on the same node doesn’t seem possible at premium pricing. Intel has to cut prices or use its marketing strategies, the latter being the probable choice.
Final thoughts
Overall, Advanced Micro Devices has a window of opportunity to gain market share until the 10nm parts from Intel hit the market. On the same processing node, market share will most certainly shift toward Advanced Micro Devices given price, power and performance balance of Ryzen chips. Intel's marketing dollars may come into play during the good part of 2017. Regarding the stock, Advanced Micro Devices is already trading on the high side; investors looking to hold on to the stock should use put option strategies in case Intel’s marketing stunts materialize.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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