AMD beat estimates by $110 million on the top line and was in line on adjusted EPS expectations of $0.92. Despite the beat in Q3, AMD guided for Q4 revenue slightly below consensus estimates at midpoint.

AMD is a fundamentally strong company with data center revenue growth accelerating for many quarters now, client revenue rebounded sequentially, and margins are improving. As Jean Hsu stated toward the end of the Q&A: “But when you look at our Data Center segment performance, we more than doubled the revenue year-over-year, but we tripled the operating income year-over-year.”

Regarding the Client segment, AMD and analysts acknowledged there may be consumer weakness in PCs from other companies, yet AMD stated they have the strongest PC line up in company history on the market today. This is evident considering Intel guided Q3 to be flat to down in their Client segment yet AMD’s growth was up 29% YoY and 26% QoQ to $1.88 billion.

The slight miss at the midpoint is likely due to Embedded, as Jean Hu, the CFO, stated next quarter would be: “driven by strong growth in our Data Center and Client segment, more than offset decline in the Gaming and Embedded segments.” It was further stated that embedded “demand continues recovering gradually, led by strength in test and emulation offset by ongoing softness in the industrial market.”

Revenue

AMD reported revenue of $6.82 billion in the third quarter, for YoY growth of 17.6%, a ~770 bp sequential acceleration from 8.9% YoY growth in the prior quarter. Data center drove Q3’s growth, while Client revenue rebounded significantly, offsetting continued weakness in gaming and embedded.

CEO Lisa Su said that AMD delivered “record revenue led by higher sales of EPYC and Instinct data center products and robust demand for our Ryzen PC processors,” with “significant growth opportunities across our data center, client and embedded” moving forward.

Looking ahead, AMD guided for revenue of $7.5 billion, +/- $300 million, for Q4, correlating to YoY growth of ~21.6% at midpoint, or a 400 bp sequential acceleration. While this fell just shy of the consensus estimate for 22.3% YoY growth to $7.55 billion, revenue growth is still expected to accelerate to the low-30% range in the first half of fiscal 2025.

Margins

As noted in our pre-earnings report, AMD’s margins continue to benefit from the increasing mix of data center products, primarily from EPYC CPUs as GPUs are currently dilutive to margins but will eventually be accretive to margins over time.

• Q3 gross margin was 50%, up from 49% last quarter and 47% in the year ago quarter. Adjusted gross margin was 54%, slightly ahead of the 53.5% guide, and increasing from 53% last quarter and 51% in the year ago quarter.
• For Q4, management guided for adjusted gross margin of 54%, flat sequentially.
• Q3 operating margin expanded to the double-digit range, at 11%, driven by increased data center mix – this compares to a 5% operating margin last quarter and a 4% margin in the year ago quarter.
• Operating income surged sequentially, with Q3’s operating income of $724 million up ~169% QoQ from $269 million. This was driven primarily by data center growth and margin expansion (covered below in Segments).
• Adjusted operating margin came in at 25%, in line with expectations, while management’s guidance implies Q4’s adjusted operating margin rises to nearly 27%.

• Q3 net income was $771 million, an increase of 191% QoQ and 158% YoY. Net margin was 11% in the quarter, up from 5% last quarter and last year. Adjusted net income was $1.50 billion, up 34% QoQ and 33% YoY, for a 22% margin.

EPS

GAAP EPS significantly improved in the quarter due to margin substantially improving, with operating and net margin both in the double digit range in the quarter.

• GAAP EPS of $0.47 beat estimates for $0.41, and represented YoY growth of 161% and QoQ growth of 194%.
• Adjusted EPS of $0.92 met estimates, and represented YoY growth of 31% and QoQ growth of 33%.

Given the revenue acceleration through Q4 and the first half of 2025 along with improved operating leverage from increased data center mix driving higher operating margins, adjusted EPS growth is expected to accelerate more than 40 percentage points to the mid- to high-70% range by Q2 2025.

Cash and Balance Sheet

Cash flows still have room to improve, as margins contracted in Q3, with AMD reporting operating and free cash flow margins falling by 100 bp QoQ. However, other line items, particularly accounts receivable and inventories, surged sequentially, hinting at potential strong growth ahead.

• Operating cash flow was $628 million in Q3, or a 9% margin. This compares to a 10% margin in both Q1 and Q2.
• Free cash flow was $496 million, or a 7% margin, versus an 8% margin in Q2.
• Cash and equivalents totaled $4.54 billion, while debt totaled $1.72 billion.
• Inventories totaled $5.37 billion, rising nearly 8% QoQ as AMD continues to ramp data center GPUs and move towards an annual release cadence.
• Accounts receivable surged 26% QoQ to $7.24 billion, after hovering in the $5 billion range for the last four quarters.

Segments

Data Center

AMD’s data center segment once again drove growth in the quarter, with management boosting FY24’s AI revenue target once more, now seeing AI revenue exceeding $5 billion, versus a prior view for $4.5 billion-plus in AI revenue. Management stated AI revenue is at $1.5 billion per quarter, or 22% of revenue.

Data center revenue accelerated 7 percentage points to 122% YoY, with AMD reporting $3.55 billion in revenue in the segment. QoQ growth was 25%, accelerating from 21% QoQ in Q2. AMD once again witnessed strong demand for AMD Instinct GPUs and EPYC server CPUs.

Data center’s operating margin continues to expand, with segment operating income rising 240% YoY and 40% QoQ to $1.04 billion. This was an operating margin of 29%, expanding from 26% last quarter and 19% in the year ago quarter.

Zen 5 Turin launched this month and will help support data center sales next year. Regarding the AMD versus Intel battle, Lisa Su made it clear that AMD continues to take market share: “We believe we gained server CPU share in the quarter as enterprise wins accelerated. Cloud providers expanded their use of EPYC CPUs across their infrastructure, and we began the initial ramp of fifth-gen EPYC processors” and that “Meta alone has deployed more than 1.5 million EPYC CPUs across their global data center fleet to power their social media platforms.”

The MI325X launched earlier this month with increased memory capacity and bandwidth, with AMD stating it offers 20% higher inferencing than the H200. The MI325X is in production shipment this quarter and “interest for MI325X is high.” The MI350 will launch in H2 2025 and the MI400s with CDNA Next architecture will launch in 2026. We had stated in our pre-earnings writeup that CDNA 4 and also CDNA Next architecture should be a defining moment for AMD in terms of narrowing the product road map with Nvidia.

Regarding the MI300 AI accelerators, Meta and Microsoft are large customers due to TCO advantages (total cost of ownership). Management also offered statements around RocM’s progress, stating that foundational support is growing and performance gains are improving by 2.4X.

Client Segment:

Though there were some weaker data points around PCs, as stated in the pre-earnings writeup, AMD is less of a concern in that regard as the company’s lineup is loaded with stellar releases. The company recently released the Zen 5 architecture including the Ryzen AI 300 laptops with a neural processing unit (NPU) with 50 TOPS of AI performance, and the Ryzen 9000 series for desktops – making them the most powerful units on the market today. Lisa Su stated it “this is the strongest PC portfolio we’ve had in our history.”

AMD’s ‘Zen 5’ Ryzen processors were met with “strong demand,” driving Client revenue up 29% YoY and 26% QoQ to $1.88 billion.

Although it looks like quite a sharp deceleration over the past two quarters, Client revenue has reached the highest level since Q2 2022. Client operating income also increased, up 97% YoY and 210% QoQ to $276 million; this represents an operating margin of 15%, up from 6% last quarter and 10% in the year ago quarter.

Management stated that AMD has “very high” share in the desktop channel, and that AMD “saw some of our highest sell-through.”

Gaming

AMD has still not escaped the trough in gaming, with revenue declining (69%) YoY and (29%) QoQ to $427 million. AMD said that the weakness was due to a decline in semi-custom revenue. Operating income for the segment also dropped substantially, falling to just $12 million, or a 3% margin, compared to a 12% margin last quarter and a 14% margin last year.

Embedded

Embedded revenue has begun to recover, following management’s comments last quarter about order patterns improving. Revenue in the segment rebounded 8% QoQ but declined (25%) YoY to $927 million. Operating margin for the segment was 40%, flat QoQ and down from 49% last year.

Earnings Call:

AI Revenue:

There was a question on the call about how large AI revenue is on a quarterly basis, to which Lisa Su provided more information, stating it exceeds $1.5 billion. The comment that the GPU business is approaching the scale of the CPU business will be key for investors to put into perspective, as it’s a big statement as we move into 2025.

Timothy Arcuri   

I had a quick 1 and then a more intensive question. So the first one is I wanted to ask about the September actuals for Data Center GPU. It seems like it was in the $1.5 billion range. And that would put December in kind of the $2 billion range. Is that about right?

Lisa Su   

So it's a pretty granular question, Timothy. But maybe let me help you with this. We actually did better in the Data Center GPU business relative to our initial expectations. So you would imagine that the business was actually greater than $1.5 billion. I mean we're actually seeing now our GPU business really approaching the scale of our CPU business.

-End Quote

There was an analyst on the call attempting to clarify if AI revenue would be flat QoQ.

Stacy Rasgon:

[…] You said it was approaching the size of Your compute business which you put around what under $1.7 billion, maybe a little more. Is that right? And like if that is right, it implies that at $5 billion for the year, you'd actually be down in Q4. So I'd probably got to be $5.2 billion or $5.3 billion for the full year, just to be flat sequentially and more than that to get growth […]

Lisa Su:

Right, Stacy. So first, a couple of things. You have to remember that in our Data Center segment, we have some other revenue that is not CPUs and GPUs, right? We have some FPGAs and other things. But the question earlier was the revenue of $1.5 billion, and I said that it was greater than $1.5 billion. So take that as a fundamental. And then as — we talked about — we didn't guide an exact number for the data center GPU. We said exceed $5 billion.

-End Quote

Lisa Su also stated: “What I would say about 2025 is we feel very good about the growth opportunities I would say that it might be lumpy. In general, these are large customer acquisitions and it's not always predictable exactly which quarters you would expect the significant build out.”

My comment: Lumpy to the upside … sounds bullish for next year.

Here was another time that Lisa Su clarified that the lumpiness would be to the upside: “So these are large customers that drive deployments. Like for example, the third quarter was a bit higher than we expected. That was driven by some additional customer demand, and we may see that type of lumpiness.”

There was a pointed question about how AMD plans to catch up to Nvidia’s product road map, to which it was stated: “I think MI300, when we launched it was behind H100, H100 was in the market for a much longer time. And we have with our accelerated road map actually closed a good part of that gap. I think MI325 is a great product. It's going to compete very well with H200 and the MI350 series will compete very well with Blackwell.”

It was also insinuated that Blackwell’s AI systems, which are more complex, could be a tailwind for AMD. “In the overarching view of the world, frankly, the market continues to be constrained, particularly in the newer product generations. It takes a long time to go from, let's call it, shipping your first samples to actually ramping in volume production workloads. And I think one of the advantages that we have with the — with our portfolio is that from a data center retrofit standpoint, it's actually a much easier ramp, just the infrastructure is the same.”

If we read between the lines, Lisa Su is stating that AMD is positioned to answer the overflowing demand from Blackwell, and in a way the supply chain can handle, as it’s well-known that Blackwell is running into wafer capacity limits compounded by a larger die size.

Lisa Su also echoed my understanding of roughly when AMD should narrow the product road map with Nvidia: “We feel very good about the progress I think next year is going to be about expanding both customer set as well as workload. And as we get into the MI400 series, we think it's an exceptional product. So — all in all, the ramp is going well, and we will continue to earn and — earn the trust and the partnership of these large customers.” The MI400 is on the new CDNA architecture and is ramping in 2026.

Margins:

As stated in the pre-earnings writeup, margins are an area where AMD and Nvidia offer quite a contrast. AMD’s data center margin is 29% with a company operating margin of 11% compared to Nvidia’s 60%.  The guide is for flat margins next quarter. The CFO was encouraging in terms of what to expect for 2025: “When we scale the company next year, you can see we're going to benefit from economies of scale to continue to drive our operational efficiency to improve gross margin.”

Conclusion:

As we get more earnings reports this quarter, it should become evident that AMD’s Client growth is unusually strong and is truthfully a defining moment. Remember, we had pulled PC data that showed flat to negative PC growth YoY for Q3 industry wide. In the pre-earnings report, I had stated AMD is incrementally stronger and could go unscathed, but this is quite the growth in a quarter where unit sales were flat to declining industry wide. We will not lose sight of this incremental strength as we plan for 2025.

Regarding AMD’s GPU story … slowly but surely, AMD will show the market it should take the company seriously. These things take time. It was our understanding going into this report that the 2025 MI350s and 2026 MI400s is when the product release cycle will start to narrow with Nvidia, and this was echoed on the call.

On the AH price action, we had pointed out on the Q4 webinar that SMH was looking unusually weak. Whether it’s due to potential tariffs or potential consumer-facing weakness in the semiconductor industry, or a combination of both, I’m not sure. But the point is that I do not believe AMD is selling off for reasons that are specific to the stock. The earnings report was strong, and we will look to keep this as a leading position for next year.

Recommended Reading:

• AMD Q3 Earnings Preview: AI Revenue Estimated to be $5 Billion
• Q4 2024 Earnings Kickoff Webinar Replay
• Micron Q4: Data Center Drives Beat, Profitability Soars
• Micron FQ4 Earnings Preview: Attractive Valuation, Look for Non AI-Related Weakness

AMD will release its Q3 2024 results tomorrow. Analysts expect Q3 revenue to grow 15.8% YoY to $6.71 billion and adjusted EPS to grow 30.8% YoY to $0.92.

There are three primary growth segments for AMD. In data center CPUs, AMD has been a force to reckon with and continues to stomp on Intel. The most recent numbers for data center market share is at 34%, up from 4% in March of 2020 when our firm first predicted AMD was setting up for an epic comeback. The Turin EPYC processors were previewed in June and are expected to ramp with broad availability into the second half of the year.

Secondly, given Nvidia sparked an AI boom, the market is hyper focused on AI accelerators, and thus, there is outsized pressure on AMD to raise its revenue on MI300 GPUs. The Street whisper is that AMD will raise this number to $5 billion for this year (up from $4.5 billion), with some analysts predicting AMD will report $10 billion in GPU revenue next year. Regarding analyst expectations of $5 billion this year, this aligns with AMD’s commentary: “When you look at the second half we will continue to see Data Center to be the major driver of our top-line revenue growth” and expectations data center will grow sequentially. Last quarter, data center grew 115% year-over-year in Q2.

If we assume the $5 billion will be guided in tomorrow’s call, this equates to 19.5% of revenue this year, and if we assume the $10 billion materializes, it means AMD will end 2025 with 30% of the company’s revenue from AI. Management has already pointed out the MI300 series marks the fastest ramp in company history, and given they are sitting on tech’s second-best comeback of all time with EPYC processors, this is not a casual statement to make. For perspective, Broadcom will end this year with 23% in AI revenue, if we take their current fiscal year guide. Recently, AMD moved to an annual cadence for its GPUs with the MI325X expected to ship in Q4 2024 and MI350 expected in H2 2025.

Investors who own AMD are contending with market psychology around what it means to be second place in the highly competitive industry of tech. Additionally, AMD is known for undercutting on price, and thus, the MI300s are expected to be dilutive to margins, whereas Nvidia’s H100s and H200s have provide historic margins. Long-term, management has emphasized that GPUs will be accretive and above the corporate average (see paragraph below). With that said, for this report, AMD is expected to report an expansion in adjusted operating margins from 22% last quarter to 25% this quarter due to EPYC CPUs helping product mix. If reported, it will mark the highest adjusted operating margin in two years.

The third point to consider going into tomorrow’s report, is that it’s widely expected that client-facing semiconductor segments will be softer than expected this quarter. We’ve seen evidence of this in ASML, Texas Instruments and ON Semi. For AMD, this refers to the company’s PC exposure. We covered in the webinar the PC data the I/O Fund is closely tracking, which shows Q3 being meaningfully softer than expected, and that ultimately PCs will miss the 2024 estimates that industry analysts had going into this year. Last quarter, Client revenue was $1.492 billion, up 49% YoY and up 9% QoQ. Management stated at the time: “In summary, we delivered strong second quarter results and are well positioned to grow revenue significantly in the second half of the year, driven by our data center and client segments.”

There is QoQ growth in PCs from Q2, yet within the industry estimates for Q3 across the PC industry, YoY is negative. AMD has a strong CFO (which helps with guiding correctly) and the company incrementally stronger than its peers on PCs. There is a scenario where AMD squeaks by unscathed by PC softness and its peers do not, as the company recently released the Zen 5 architecture including the Ryzen AI 300 laptops with a neural processing unit (NPU) with 50 TOPS of AI performance, and the Ryzen 9000 series for desktops. Management was positive about this upcoming quarter, stating to expect “above-typical seasonality given the strength of our product launches.”

Canalys has the most optimistic estimates for PCs, whereas IDC and Gartner are negative on a YoY basis at (-2.4%) and (-1.3%) respectively.

Revenue

Revenue is expected to accelerate in the coming quarters, driven by strong demand for data center CPUs and GPUs, coupled with the expected rebound in the Client segment.

• Analysts expect Q3 revenue to grow 15.8% YoY to $6.71 billion and accelerate to 22.3% in Q4. Revenue is expected to further accelerate to 33.5% in Q1 2025.
• Management revenue guide is $6.7 billion, representing YoY growth of 15.5% at the midpoint. This represents a 6.6-point acceleration from 8.9% growth to $5.84 billion in Q2.

Lisa Su said in the Q2 earnings call, “We delivered strong second quarter results and are well positioned to grow revenue significantly in the second half of the year, driven by our data center and client segments. Our data center GPU business is on a steep growth trajectory as shipments ramp across an expanding set of customers. We're also seeing strong demand for our next generation Zen 5 EPYC and Ryzen processors that deliver leadership performance and efficiency in both data center and client workloads.”

• Analysts expect 2024 revenue to grow 12.9% YoY to $25.61 billion and accelerate to 28.3% growth in 2025.
• 2026 revenue is expected to grow 19.9% YoY to $39.38 billion.

Margins:

AMD’s margins are benefiting from a higher mix of data center revenue. This quarter is expected to report the highest adjusted operating margin in two years.

• Q2 gross margin was 49%, compared to 46% last year. Adjusted gross margin improved to 53% from 50% in the same period last year, helped by a higher portion of data center revenue. Management guide for Q3 is 53.5%, up from 51% in Q3 2023.
• Q2 adjusted operating margin was 22%, compared to 20% in the same period last year. Operating expenses increased 15% YoY to $1.8 billion due to higher R&D expenses required to address AI growth. Management guide for Q3 is 25%, up from 22% in Q3 2023.

• Q2 net income was $265 million or 5% of revenue compared to $27 million or 1% of revenue in Q2 2023. Adjusted net income was $1.13 billion or 19% of revenue compared to $948 million or 18% of revenue in the same period last year.

EPS

EPS is expected to grow significantly in the coming quarters.

• Analysts expect Q3 adjusted EPS to grow 30.8% YoY to $0.92, by 50.2% to $1.16 in Q4, and by 76.6% to $1.09 in Q1 2025.

• Analysts expect 2024 adjusted EPS to grow 27.9% YoY to $3.39 and accelerate to 59.7% growth to $5.41 in 2025.
• Analysts expect 2026 adjusted EPS to grow 36% YoY to $7.36.

Cash Flow and Balance Sheet

The company has increasing cash flows with room for improvement. At its peak in 2021, AMD reported over 25% cash flow margins.

• Q2 operating cash flow was $593 million or 10% of revenue compared to 7% in Q2 2023.
• Free cash flow was $439 million or 8% of revenue compared to 5% in Q2 2023.
• Inventories were $4.99 billion, compared to $4.65 billion in Q1. They were up primarily due to the continued ramp-up of a data center GPU product.
• Cash and short-term investments were $5.34 billion, and debt of $1.72 billion, compared to $6.04 billion and $2.47 billion in Q1. The company repaid $750 million in debt that matured in June with existing cash. It repurchased shares worth $352 million, with $5.2 billion of share authorization remaining.
• The company completed the Silo AI acquisition in August for about $665 million in cash. AMD also announced the acquisition of ZT Systems for $4.9 billion, which will close in the second half.

Segments

Data Center revenue grew 115% YoY and 21% QoQ to $2.83 billion. The company reported record data center revenue in Q2, accounting for 49% of revenue. The company witnessed strong demand for AMD Instinct GPUs and double-digit EPYC server revenue growth. Data Center is expected to continue to be a major driver of top-line growth in the second half of the year. Data Center’s operating margin was 26% compared to 11% in the same period last year.

Client segment revenue grew by 49% YoY and 9% QoQ to $1.49 billion. It was primarily helped by strong demand for Ryzen processors and initial shipments of the next-generation Zen 5 processors. The client segment is expected to grow sequentially in Q3, and management said in the Q2 earnings call that the customer response for the new Ryzen processors was strong, and it is expected to capture additional revenue market share (see below). Operating margin was 6% compared to (-7%) in the same period last year.

The gaming segment continues to struggle due to soft demand. Revenue declined by (-59%) YoY and (-30%) sequentially to $648 million. Management expects gaming segment revenue to decline double digits sequentially in Q3. “Semi-custom demand remains soft, as we are now in the fifth-year of the console cycle and we expect sales to be lower in the second half of the year compared to the first half.” The operating margin was 12% compared to 14% in Q2 2023.

Embedded segment revenue declined by (-41%) YoY and was up 2% sequentially to $861 million. Management observed initial signs of improving order trends and expect embedded revenue to gradually recover in the second half of the year, with revenue expected to be up sequentially in Q3. Operating margin was 40% compared to 52% in the same period last year.

Other Key Points

AI Revenue

AMD’s AI accelerator, the MI300, is the fastest-ramping product in AMD’s history. The company reported over $1 billion in MI300 revenue in Q2. Management expects MI300 revenue to ramp in Q3 and Q4. During Q2 results, the company raised the data center GPU guide from $4 billion to $4.5 billion for the year 2024. The company also cited in the earnings call that Microsoft was the first hyperscaler to announce the general availability of MI300X instances.

“Turning to our data center AI business, we delivered our third straight quarter of record data center GPU revenue with MI300 quarterly revenue exceeding $1 billion for the first time. Microsoft expanded their use of MI300X Accelerators to power GPT-4 Turbo and multiple co-pilot services including Microsoft 365 Chat, Word, and Teams. Microsoft also became the first large hyperscaler to announce general availability of public MI300X instances in the quarter.”

Strong Product Roadmap

The company announced earlier this year its expanded AMD Instinct accelerator roadmap and annual cadence for chip release. During the recent Advancing AI Event, the company also confirmed that MI325X chips are expected to be shipped in Q4 2024 and the launch of MI350 chips in the second half of next year.

Lisa Su said in the Q2 earnings call, “Looking ahead from a roadmap perspective, we are accelerating and expanding our Instinct roadmap to deliver an annual cadence of AI accelerators, starting with the launch of MI325X later this year. MI325X leverages the same infrastructure as MI300 and extends our generative AI performance leadership by offering twice the memory capacity and 1.3 times more peak compute performance than competitive offerings. We plan to follow MI325X with the MI350 series in 2025 based on the new CDNA 4 architecture, which is on track to deliver a 35x increase in performance compared to CDNA 3. And our MI400 series powered by the CDNA “Next” architecture is making great progress in development and is scheduled to launch in 2026.”

Lisa Su predicts that AI Data Center Accelerators TAM to reach $500 billion by 2028 growing at a CAGR of 60% from $45 billion in 2023, compared to the earlier prediction last December of reaching $400 billion in 2027. She also highlighted the strong MI300X performance during the Advancing AI Event. “If you look today at MI300x performance, we have more than doubled our inferencing performance and significantly improved our training performance on the most popular models. Today, over 1 million models run seamlessly out of the box on Instinct, and that's more than 3x the number when we launched in December.”

She further pointed out, “MI300X consistently outperforms the competition, which is H100 in inferencing. So, for example, using Llama 3.1 405B, which is one of the most newest and demanding models out there, MI300 outperforms H100 with the latest optimizations by up to 30% across a wide variety of use cases.”

I/O Fund note: It would be stronger to benchmark the MI300X against the H200s but the competition in releases is likely to become tighter with each generation. The MI325 is due out this quarter, and thus AMD is about two quarters behind Nvidia’s H200.

AI Software

AMD completed the acquisition of Silo AI in August. Silo AI specializes in large language model development, which will further enhance AMD's AI inference and training tools. The acquisition will also help to tap the talent pool of engineers and scientists of Silo AI who have used AMD hardware and provide customized AI solutions to its clients.

AMD announced in August that it would acquire ZT Systems for $4.9 billion. The deal is expected to boost data center AI solutions. Once the deal closes, AMD plans to sell the ZT Systems manufacturing business. The acquisition is expected to close in the first half of 2025 and be accretive on a non-GAAP basis by the end of 2025.

AI PCs and Zen 5 EPYC Processors

At the Advancing AI Event, Lisa Su discussed the success of EYPC CPUs since their launch in 2017. She pointed out that “EYPC has become the CPU of choice for the modern data center.” The cloud providers offer more than 950 EPYC instances, and on the enterprise side, larger server OEMS offer over 350 EPYC platforms, increasing the company’s server CPU market share to 34%.

Recently, AMD launched the 5th Gen AMD EYPC CPUs, formerly codenamed Turin. They are suited for cloud, enterprise, and AI use cases. They use the advanced 3nm/4nm process technology. The new Zen 5 core architecture, provides up to 17% better instructions per clock (IPC) for enterprise and cloud workloads and up to 37% higher IPC in AI and high-performance computing (HPC) compared to Zen 4 architecture.

During the Q2 earnings call, Lisa Su also said that the Client segment is also expected to do well in the second half of the year along with Data Center segment. It is expected to be above seasonal due to the launch of new products. The new Ryzen AI 300 laptops and the Ryzen 9000 series for desktops are powered by the 5th generation of the Zen architecture. The Ryzen AI 300 laptop has a XDNA 2 neural processing unit (NPU) that is designed for Microsoft Copilot+ AI software. This will deliver 50 TOPS of AI performance, exceeding Apple’s M4.

“We are launching Zen 5 desktops and notebooks with volume ramping in the third quarter. And that’s the primary reason that we see above-seasonal. The AI PC element is certainly 1 element of that, but there is just the overall refresh. Usually, desktop launches going into a third quarter are good for us, and we feel that the products are very well positioned. So those are the primary reasons.”

Note on GPU Margins:

It’s prudent to make a note that another area where AMD is not keeping pace with Nvidia is pricing power, leading to GPU margins that are currently below the corporate average. Here was a statement from management when questioned on the margins last quarter:

“Yes. On your second question about the profitability, first our team has done a tremendous job to ramp the product MI300. It is a very complex product. So we ramped it successfully. At the same time, the team also started to implement operational optimization to continue to improve gross margin. So we continue to see the gross margin improvement. Over time, in the longer term, we do believe gross margin will be accretive to corporate average.”

Valuation

The company trades at a P/E ratio of 185.5 and a forward P/E ratio of 44.9.

P/S ratio is 11.5 compared to the five-year average of 8.6. The forward P/S is 10 and the 1-year forward is 7.8.

Conclusion

Fundamentally, AMD is quite strong due to the continued strength in CPUs, the ongoing growth in GPUs, and the expected rebound in the Client Segment. We feel AMD is a win-win for our portfolio. Should the company beat, we will participate. If the company misses or something more broad weighs on the company (such as tariffs on semiconductors) then we will gladly buy shares lower.

We like Lisa Su reiterating the 2027 time frame for a $400B TAM, and increasing the estimate to $500B the following year for 2028. We will match that timeline and say we hope to see AMD be a leader in the market and in our portfolio by 2027-2028. CDNA 4 architecture is due out in 2025-2026, and is the most likely catalyst that I see today to narrow the product road map with Nvidia.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article. Beth Kindig, Lead Tech Analyst, contributed to this article.

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