Advanced Micro Devices, Inc. (NYSE:AMD) forecast stronger-than-expected revenue growth of 22 percent in the third quarter from the second, as the chip maker expands into new game consoles and other markets to offset slowing sales of personal computers. That indicates a range of $1.38 billion to $1.45 billion. Analysts on average had estimated sales of $1.23 billion, according to data compiled by Bloomberg.


AMD revenue forecast

Advanced Micro Devices, Inc. (NYSE:AMD), which for decades has competed against market leader Intel Corporation (NASDAQ:INTC) in supplying chips for PCs, is rushing to refocus on new markets as consumers buy fewer laptops and more tablets and smartphones.

AMD processors are being used in Microsoft Corporation (NASDAQ:MSFT)’s upcoming Xbox One and Sony Corporation (NYSE:SNE) (TYO:6758)’s next-generation PlayStation game consoles. These are largely behind AMD’s upbeat revenue forecast.

Advanced Micro Devices, Inc. (NYSE:AMD) is winning orders for its chips outside of the PC market, which shrank for a fifth straight quarter, market researchers said. Orders for game-console processors from Sony Corporation (NYSE:SNE) (TYO:6758) and Microsoft Corporation (NASDAQ:MSFT) have the company on track to surpass Chief Executive Officer Rory Read’s target to get more than 20 percent of sales from new markets, said Cody Acree, a Dallas-based analyst at Williams Financial Group.

“It’s because of the very solid visibility that they have in consoles,” said Acree, who recommends buying AMD shares. Acree estimates the company could bring in more than $250 million in sales of game-console chips this year.

Not benefiting a key measure of profitability

“It was a great report but a lot of the good news is already priced in,” said Betsy Van Hees, a San Francisco-based analyst for Wedbush Securities. She has the equivalent of a hold rating on the stock. Investors will need more evidence of success in other new markets before the stock can move higher, she said.

While expanding into new areas is helping Advanced Micro Devices, Inc. (NYSE:AMD)’s sales, it’s not benefiting a key measure of profitability. Gross margin, or the percentage of sales left after deducting the cost of production, will drop to about 36 percent this quarter  from 40 percent in the second quarter, the company said.

Gross margin is a less important indicator for console chips because the company has already paid for the research and development and won’t have to spend on marketing, said Chief Financial Officer Devinder Kumar on the call.

Bernstein analyst Stacy Rasgon said Advanced Micro Devices, Inc. (NYSE:AMD)’s gross margin forecast was probably behind the after-hours drop in the company’s shares.