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If buzz on the web is to be believed, then Microsoft (NASDAQ:MSFT) will use an AMD (NYSE:AMD) processor, which combines the Jaguar CPU with a graphic chip, to power its next generation Xbox game console. Though the news has yet to be confirmed by either of the two companies, these rumors led to a near 15% rise in AMD’s stock price, which has lost more than 60% of its value during the last year.

AMD is a leading PC microprocessor manufacturer and its business has been severely hit by the PC slowdown. With revenues declining by over 17% and a net loss of $1.18 billion in 2012, the company has been struggling to turn around its operations. We believe that providing chips for game consoles is a welcome move for AMD as it can help the company reduce its dependence on the PC market, which is expected to decline for the second consecutive year in 2013.

As part of its restructuring effort initiated in Q3 2012, AMD is focusing on increasing its share in additional embedded markets including gaming, communication and industrial, among others. It intends to leverage the success of its APUs and graphics to tap the growing potential in such markets. AMD aims to increase the revenue contribution from its embedded business to almost 20% by 2014, from the current level of a mere 5%.

Earlier this year, Sony (NYSE:SNE) announced that its Playstation 4 will be powered by an AMD custom system-on-a-chip processor - Jaguar core with AMD’s Radeon GPU. Following suit, Microsoft will drop the Power PC technology designed by IBM (NYSE:IBM) which means that the Xbox 360 software will be incompatible with the next generation model. With the aim to reduce development costs, developers and publishers are shifting toward PC style x86 architectures for next generation consoles, which is a welcome trend for AMD.

The Sony Playstation 3 uses a Nvidia (NASDAQ:NVDA) GPU. With a higher market share, Nvidia has the upper hand in the GPU market right now. However, the fact that Sony opted for AMD over Nvidia for its Playstation 4 signifies that there is stiff competition between the two companies. Thus, we believe that AMD is in a strong position to leverage growing opportunities in the $67 billion local video game market.

Disclosure: No positions.

Source: AMD Targets Game Consoles To Soften Blow From PC Weakness