Why AMD Will Win If Xbox One and PS4 Price War Breaks Out

Advanced Micro Devices Inc. (NYSE: AMD) seems to have a lot to be thankful for, outside of a declining PC market. The company’s leadership in graphics was made evident when its CPUs were selected by both Sony Corp. (NYSE: SNE) for the PlayStation 4 and Microsoft Corp. (NASDAQ: MSFT) for the Xbox One video game console refresh cycles last year. This dual adoption by both gaming systems is likely to act as the key stabilizing force for the next year or two while AMD goes after its other growth and recovery initiatives. Now AMD has a new potential boost — a price cut in the Xbox One.

The driving force behind this call is that lowering the prices of gaming consoles leads to more unit sales. More unit sales will mean more CPU orders for AMD once the inventory of CPUs starts running low. Again, AMD is inside the Xbox and PlayStation refresh systems that came out late last year.

On Friday, both Walmart and Best Buy started offering a bundle of Microsoft’s Xbox One and the hit video game Titanfall for $450 combined. This is a $50 discount from the combined price of the separate items. One issue that came up was that the PS4 hit the shelves first. Another issue is that it had been years since the last video game system had been refreshed.

While there are many other things going for it, the focus of AMD’s win here is the potential price war between Sony and Microsoft. When they are out of AMD chips, they likely will not be able to tell AMD that they are making lower margins now and have to get the chips cheaper. After all, it is not like Microsoft or Sony could switch to an Intel CPU mid-cycle — they almost certainly are married to AMD for the next few years.

Roughly 4 million Xbox One units had been sold by the end of January, while close to 6 million PS4 units had sold by the end of February. AMD itself showed that more than 7 million units had been sold (combined) after just two months — about double the prior generation refresh cycles.

A price cut may not help AMD out on a one-quarter basis, but it almost certainly will help drive more unit sales through time. AMD is committed to profitability in 2014, and the company has a lot of years to make for as far as its long-term investors are concerned. A video game console price war would likely only help AMD.

24/7 Wall St. named AMD as one of nine companies that could double in 2014. That list is now down to seven, but AMD remains in the running, and the stock’s price of $3.48 at the inclusion time means that AMD would go to just shy of $7 for it to double.

On another note, AMD managed to close above $4.00 for the second day in a row on Friday at $4.04.