It has been widely speculated that Advanced Micro Devices (NASDAQ:AMD) will not only power the next Sony (NYSE:SNE) Playstation 4, but also the next Microsoft (NASDAQ:MSFT) Xbox. While the news about the Playstation was taken in stride by the market, which was in the process of punishing AMD down into the low $2s, the same thing did not happen with the more recent rumors regarding the Microsoft Xbox.
Indeed, feeding on the market's speculative juices injected into circulation by the FED gland, traders have bid up AMD all the way up to $3.61, for a gain of close to 50% in less than one month. This is slightly surprising, in that the rumors of AMD having won both next-generation consoles were already present months ago. But the market, hot as it is, decided to pay these rumors attention just now.
At this point we know for sure that Sony's PS4 will have an AMD APU, pairing a 1.6Ghz 8-core CPU to an AMD GPU likely to be in the same class as the AMD Radeon 7790.
On the other hand, the rumors that made AMD fly, and which are a near-certainty since they've been confirmed by game publishers which saw the hardware, are that the Microsoft Xbox will carry a nearly-identical AMD APU. It, too, should be a 1.6Ghz 8-core CPU using the "Jaguar" core, paired with an AMD GPU that will be somewhat weaker than the Sony's though of similar architecture.
Significance for AMD
No doubt Sony and Microsoft will sell tens of millions of these new-generation gaming consoles. This will thus give AMD a lifeline even if it's likely that we're talking abusively low-margin, cut-throat business. Indeed, those same margins are the reason why Nvidia (NASDAQ:NVDA) seems to have dropped out of the running, leaving the field open for AMD.
However, there's something else which might also have an effect. Both of these new-generation consoles are close to being PCs-in-disguise. They'll use x86 CPUs and the Sony Playstation's development environment will even run in Windows 8 and use Microsoft's Visual Studio. By leaning on PC components and letting go of some of the cutting edge tech consoles were famous for, it will probably be possible for Sony and Microsoft to minimize launch costs, and thus to price the consoles cheaper at launch and achieve greater quantities.
Although the consoles will work as a lifeline for AMD, there's not a huge reason at this point to think that they'll greatly improve AMD's profitability. This will probably mean that when the Microsoft Xbox is finally officially announced, the stock will suffer a "sell the news" reaction. In short, now is probably too late to speculate on AMD, and come May 21st -- when Microsoft is supposed to announce the new Xbox -- one would do well not to buy AMD stock, especially in any spike on that day.
After ignoring the launch of the Sony Playstation 4, AMD has gone ballistic with the rumor that it will also be included in the new Microsoft Xbox. It's a near-certainty that AMD will also be in the new Xbox, and the new generation consoles should sell well, but it's also likely that the implied business will be very low-margin.
So it seems we have a situation where the announcement itself, on May 21st, will lead to a "sell the news" reaction. In short, one should be warned not to fall prey to optimism right when the news strikes, as it has been widely anticipated.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.