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Advanced Micro Devices' (NYSE:AMD) stock has been on a great run since its announced win of the PS4 and the rumored win of the next generation Xbox. I think there is still potential upside. I have been following a lot of Ashraf Eassa's articles on SA, and love the points he makes on the company. Some of the points I want to make in this article expound on his ideas, and why I think AMD is positioned to win over a large share of the gaming market, and ultimately see an increase in stock price.

The lead engineer on the PS4, Mark Cerny, started his career as a game developer. When the PS3 was launched, Sony (NYSE:SNE) went overboard on a powerful, eccentric design. The drawback to the cell processor was that developers were unfamiliar with coding, causing an inherent inefficiency in the development process. According to an article on Gamasutra.com, a main focus for Cerny was to make the PS4 easier for developers. And these developers are trying to utilize all 8 cores, which will help AMD when being compared to Intel (NASDAQ:INTC) products.

In similar fashion, Microsoft's (NASDAQ:MSFT) Xbox is supposed to also be based on an AMD APU. There is a press release slated for May 21st, so I expect to see official console specs released then.

For both of the next generation consoles to be based on an AMD APU is great for developers, and great for AMD. This article links to a website in which developers are showering praise for coding on the PS4. I'm assuming enough digging would lead to similar findings on the Xbox. The AMD APUs are built around x86 architecture, making it easier on developers familiar with coding PCs to create console games, and make porting games between PCs and the next generation consoles rather seamless, along with lowering developer costs.

One point that I have not seen any other contributors make (sorry if I missed it), is that a lot of gamers are skeptical of the future of console gaming. Valve is supposedly releasing a "steam box," which is essentially a gaming PC rig packaged into a neat little box that hooks directly into your TV. In true Valve fashion, they have not released their console specs yet, but earlier in the year they began working on the project with a company named Xi3. Doing some digging on Xi3's website reveals their version of the steam box, the "Piston" (get the play on words?) also uses AMD architecture at its heart. Valve is more of a software company, so their foray into hardware seemed to be a little bit of a surprise. But it appears their overall vision for the Steam Box is to focus on putting as many boxes in the living room as possible, because their revenue is generated through content delivery, not hardware sales. Therefore, expect to see more than a few offerings of various "Steam Boxes" from different manufacturers.

What this means for stock price:

AMD's stock price surged earlier this month on the 8th when unofficial news of the Xbox using a Jaguar core was released. However, the earliest rumors of Xbox using a Jaguar core I could find were well before that. Extremetech.com's article was released on March 22nd. I have not seen any analyst mention AMD being used for "steam box" variants, but right now the market seems giddy of any news regarding AMD's future in the gaming industry. Most analysts I have seen cite this news as the reason for AMD's surging price. The E3 gaming convention is scheduled for June 2013 this year, so if any news is released regarding AMD also being utilized for the new "steam box," this further demonstrates AMD's penetration into the embedded systems market, and could cause a further rally.

Throughout 2010, 2011, and the first half of 2012, AMD traded for upwards of $5.00 per share. In 2012 during Q1/Q2, AMD had an EPS of $.12 and $.06, respectively, and traded above $5 a share. Venturebeat.com has an article that is a few years old that has historic values for how much is spent on video games and consoles per year. In the US alone in 2010, $15 billion were spent on consoles. AMD's Q1 2013 revenue was around $1.09 billion, down $500 million from Q1 2012. This is just my personal opinion, but I feel the decline in console sales is a product of gamers holding off for new console refreshes. Wii U has weak sales, and many analysts relate this to potential next gen Xbox/PS4 sales, but I disagree. Look at launches for titles like the Modern Warfare series. They have record sales every launch. The Wii U appeals to somewhat of a different audience than the more powerful consoles, so I feel analysts are reaching when they link PS4/Xbox potential sales to the Wii U. I foresee the revenue generated from console sales to have a much bigger impact on AMD's revenue than people are giving credit for. Intel's market cap is around $112 billion, whereas AMD is only $2.6 billion. Small revenue gains add up quickly for a smaller cap company; the revenue from console sales could quickly start to make up for the $500 million revenue decline QoQ. Let's assume that console sales eventually reach $10 billion a year. AMD is used in the Wii U, will be in the PS4, and will reportedly be in the Xbox. Even if AMD only receives 1% of that revenue, (assuming a console price of $400, that would be $4 per console), that would give them an added $100 million in revenue.

Conclusion

AMD has beautifully positioned itself at the cornerstone of the console gaming industry. Being used in all three next generation consoles, and at least some of the variants of a steam box, will partially divorce AMD from declining PC sales. I feel that the optimizations that will take place on coding games to operate on AMD hardware will prevent AMD from further losing market share, and possibly regain some of the lost market share to rivals Nvidia (NASDAQ:NVDA) and Intel. When AMD was profitable in 2010-2012, it was trading above $5 a share. Depending on when AMD starts shipping APUs to Microsoft and Sony, it has the potential to have its earnings reported in green for the first time since Q2 2012. When that happens, I believe AMD will return to above $5 per share.

Source: AMD's Strategic Position In The Gaming Industry

Additional disclosure: I may initiate a position in MSFT within the next 72 hours.