Flickr

AMD (NASDAQ:AMD) shares have made a surprise rally during the tail-end of the year. The shares are up 22.7% over the past one month, with the rally helping the shares finish the year in the green, up 7.5% after remaining deep in the red zone for much of the year.

AMD stock 1-month movement

Source: AMD stock price chart by amigobulls.com

To be sure, AMD shares are still exhibiting some volatility and have lost 4% over the last two trading sessions. But the sudden change in sentiment about the company without any major news on its part appears quite surprising. I have always rooted for AMD as a good contrarian play in several of my AMD posts on Amigobulls, and the sentiment about the company seems to have taken a 180-degree turn of late.

It appears as if the rally in AMD stock price began after NVIDIA's (NASDAQ:NVDA) latest results in November where the company reported strong GPU sales growth. Nvidia delivered impressive Q3 2015 results that topped expectations. Nvidia reported revenue of $1.31 billion, good for 6.5% Y/Y growth and $130 million higher than expectations. Non-GAAP EPS of $0.46 was 18% better than last year’s comparable quarter, and topped expectations by $0.21. On a GAAP basis, Nvidia reported EPS of $0.44, good for 42% Y/Y growth.

The main highlight of Nvidia’s Q3 results was the impressive performance of its gaming segment. Nvidia’s GPU sales continued to show good growth in spite of a weak PC market, increasing 12% Y/Y to $1.11 billion thanks mainly to a robust 40% growth in gaming GPU sales. Nvidia’s other GPU segments, however, continued showing weakness: Professional GPUs (Quadro) fell 8%; Data Center GPU (Tesla/GRID) sales were down 8%, while Tegra sales tumbled 23% despite growth in the automotive segment due to weakness in Nvidia’s smartphone/tablet segment.

Strong Gaming GPU Sales A Positive for AMD?

Strong gaming GPU sales by Nvidia mirrored Advanced Micro Devices’ results. AMD reported mixed Q3 2015 results that featured a worse-than-expected loss due to a large one-time inventory write down. The company reported Q3 2015 revenue of $1.06 billion, good for a healthy 13% Q/Q growth but down 26% Y/Y. The revenue topped consensus estimates of $995.8 million. AMD reported non-GAAP net loss $197 million, or non-GAAP EPS of -$0.25, which was $0.08 worse than expectations. The company blamed the loss on a huge write down of its older APUs.

AMD lumps together PC processors and GPUs in one segment so it’s usually hard to decipher the exact performance of each sub-segment. The company reported that the Computing and Graphics segment, its largest revenue segment, grew sales 12% Q/Q and -46%Y/Y. The company said that PC processors sales were weak while gaming GPU sales were strong. AMD reported that GPU ASPs were up Y/Y mainly due to its new gaming GPU products.

A common theme running in the two companies’ latest results was that the gaming GPU market is still healthy despite the ongoing weak PC market. This is important for AMD if the company is to truly recover fast enough before investors completely lose faith in AMD stock. AMD is mainly pinning its hopes of recovery on Zen, a new PC processor architecture that AMD will incorporate in its Opteron chips which would improve performance over current Opteron chips that use the Bulldozer architecture by 40%. The new Zen chips will compete with Intel's (NASDAQ:INTC) mid-range Xeon E5 chips.

AMD had earlier planned to launch Zen chips in late 2015, but the launch will now be delayed by at least one year due to poor yield and ramp-up rate by GlobalFoundries’ 14nm nodes. GGlobalFoundries is the company that manufactures AMD’s chips, but has been struggling to transition from 28nm nodes to 14nm process. The earliest date when AMD can launch the new chips has now been pushed back to Q4 2016.

Meanwhile, AMD continues to badly lag Intel in the PC market, especially now that Intel has launched Skylake. With an extra one-year wait, AMD is likely to find itself in dire straits as it continues to burn cash and investor confidence wears thin.

The performance of the company’s gaming GPU segment over the next one year could literally make or break the company. Luckily for AMD, and its investors, the company has been making decent strides in this regard. According to a report by Barron’s, AMD has been gaining market share in mid-range graphic cards at Nvidia’s expense. Nvidia’s Asynchronous Compute fiasco involved Nvidia’s graphics cards inexplicably not being able to support Microsoft's (NASDAQ:MSFT) Async Compute. Developers were therefore forced to switch to AMD’s graphic cards.

AMD has, however, continued to struggle in the high-end segment of the market where margins are better. The company’s R9 Fury X cards have reportedly been in acute short supply due to a shortage of HBM technology by Fiji, which is still at it infancy.

But the latest checks by MKM Partners offers hope for both AMD’s and Nvidia’s GPU businesses. MKM recently told Barron’s that AMD’s high-end R9 GPUs had only seen modest price declines as the company prepares for a product refresh and the launch of its next-gen GPU line codenamed Arctic Islands during the summer

Takeaway

It appears as if the ongoing weakness in the PC market has not in any way hampered PC gaming as gaming GPU sales by the market leaders Nvidia and AMD aptly demonstrate. AMD’s cash-burning PC processor business has been limiting the amount of money the company can invest in its graphic cards to compete effectively with Nvidia, and this is not likely to change soon. But AMD’s current graphic card offerings are doing well enough, and might help to keep the company afloat before Zen finally arrives. AMD stock remains a pretty good contrarian play and the stock is likely to maintain its current positive momentum in 2016.