Astera Labs delivered a solid Q4 beat with revenue up another 17.4% QoQ, though the one point to nitpick from this report was Q1’s softer margin guidance, as it would imply a step down to below the 20% GAAP operating margin level sustained for the last three quarters. In addition, the hypergrowth company is not able to keep up with high comps given sequential growth is expected to be 7.7% QoQ following many quarters of double-digit QoQ growth with some quarters as high as 20%+ sequentially.  

There were clues in the call as to when Astera is most likely to see a second wind with Scorpio-X as the catalyst. Overall, Astera has a longer runway than the market is communicating given there is an element of vendor lock-in to their products. Additionally, Ethernet is optimized for reach, whereas Astera specializes in PCIe, which is optimized for something quite different – GPU-to-GPU communication and memory-level workloads inside the rack. 

Astera also announced that it entered into a warrant agreement with Amazon, allowing the tech giant to purchase up to 3.26 million shares at $142.82 through February 2033. The warrants will vest in tranches of payments made by Amazon for the purchase of up to $6.5 billion worth of Astera’s smart fabric switch, signal conditioning and optical engine products. The vote of confidence from one of Astera’s major customers is certainly welcomed. 

UALink Versus ESUN Debate  

The simplest way to settle the UALink versus ESUN debate is that AI systems using PCIe today are upgrading to PCIe6, and those relying on Ethernet will remain with that protocol. Rather than a winner-takes-all market, the most likely outcome is a hybrid system as PCIe is superior inside the rack and Ethernet is superior for scale-out between racks. 

As covered last quarter in the Q3 Earnings write-up, Ethernet Scale-Up Networking (ESUN) is kicking up dust in the market. The market is concerned because ESUN is proposing an Ethernet solution for scale-up with the October press release stating: “ESUN is a new workstream collaboration designed as an open technical forum to advance Ethernet in the rapidly growing scale-up domain for AI systems.” 

Last quarter, I pointed out that latency is a differentiator as UALink operates in the 100s of nanoseconds versus microseconds for Ethernet (as it stands today). Bridging this gap requires a leap in product design and successful deployment, and until that occurs, ESUN is structurally disadvantaged on intra-rack scale-up workloads. 

There is a time to market issue for UALink, yet in the meantime, PCIe remains a strong choice for fast, scale-up systems. PCIe is deployable right now for scale-up pods and CXL is also a strong choice for memory pool connectivity (Astera participates in all of this). 

The reality is that PCIe wins out for tighter, low-latency scale-up. What PCIe offers is device-level interconnects for highly synchronized GPU-to-GPU communication. The strength of PCIe will only become more evident (not less) as large training jobs require more GPUs to communicate. To contrast, Ethernet is a networking protocol designed for maximum reach – which are strengths that are quite distinct from intra-rack connectivity. 

Memory access between devices is another distinction where PCIe excels as Ethernet Scale-Up does not natively address memory-level integrations. This is an area the I/O Fund is watching closely for Astera, because as memory capacity scales and speeds increase, the attach rate increases for a vendor like Astera with more PCIe lanes, more signal conditioning and fabric complexity. Overall, the memory boom should increase Astera’s content across both PCIe and CXL deployments. 

Which leads us to Scorpio-X … 

Scorpio to Become Largest Product by Year End 

For a refresher on Astera’s products, please reference our previous analysis hereour previous analysis here 

Scorpio-P contributed 15% of revenue this quarter and it was stated previously that Scorpio-P and Scorpio-X will reach more than 50% of revenue by 2026. The X-Series is highly anticipated as it’s expected to be a much higher ASP product than the P-Series. Management in the past has called the X-Series an “anchor socket” which means it will secure vendor lock-in for Astera and they will be able to add more products, such as modules and silicon level products. Last quarter, management stated: “we expect our overall dollar content opportunity per AI accelerator to significantly increase, representing another step-up from a baseline revenue standpoint.” 

The update this quarter is that the X-Series will “incrementally grow revenue in the first half of 2026, followed by a transition to high-volume production in the second half. We continue to make excellent progress with additional engagements looking to leverage PCIe for scale-up networking. As previously communicated, we are engaged with 10-plus customers for Scorpio X family. And our current expectation is that we will ship initial quantities of Scorpio X series to support new customer platforms in the second half of 2026 with volume ramp set for 2027.” 

There was an inquiry on the call as to timing and magnitude: 

Ross Seymore, Deutsche Bank AG 

I guess, Mike, as my follow-up on — to the Scorpio family. I believe you said it crossed 15% of sales in 2025. So I just want to clarify if that was true. But perhaps more importantly, sort of bogeys as far as the growth rate this year. I believe in the past, you talked about it would cross over and become your biggest product line at some point this year. Is that still the case? Any updates on those sorts of timing and magnitude? 

Michael Tate, CFO 

Yes. So yes, so we originally set up for a 10% bogey, we did cross above 15% for 2025. And again, that's all just P-Series, X is for scale up is a much bigger, larger TAM for us and that we're starting to shift initial volumes in the first half, but the more material step up in the back half. So the commonization of those 2 will put us on a trajectory for it to be our biggest product line. But Aries and Taurus and Leo are all growing as well. So it's hard to know exactly when we cross over.  

But definitely at some point, it will. It will — it's going to drive very good revenue growth for us.” 

Astera Hints at New Customer Design Wins for NVLink 

As stated in our Top 15 report, PCIe remains relevant during the Vera Rubin transition due to from Nvidia’s “Extreme Co-Design.” As Rubin brings multiple compute, networking, and memory components together into a single, tightly integrated platform, the need for rapid, low-latency data movement within the server increases. 

This extends further with Nvidia’s move to PCIe Gen6 alongside expanded CXL support on its Vera CPU, up from PCIe Gen5 on Grace. CXL enables low-latency, high-bandwidth memory and cache sharing between CPUs, GPUs, and attached memory devices, reinforcing PCIe’s role at the heart of the system architecture. PCIe fabric switches are also expected to remain critical for backend GPU-to-GPU communication and for linking CPUs, NICs, and storage at scale. 

That’s a bit of context for why one of the most important parts of the call was not related to ESUN but rather it was confirmation that Nvidia is working with Astera on NVLink integrations. This is a lengthier quote so bear with me, but it ties together the full picture of why I believe Astera has a longer runway than the market is communicating. 

Blayne Curtis, Jefferies: 

Congrats on the results and congrats, Mike, on the new role. I just want to ask you, obviously, this $6.5 billion is a huge number. I might already know the answer, but I wanted to ask you about what seems like one of the biggest debates still is the acceptance of UA Link for these next-gen designs. You mentioned two lead customers mentioning it. I'm just kind of curious as people think about your UA Link switch opportunity, particularly at your largest customer versus the custom connectivity and then maybe them using NVLink? 

I'm kind of curious with this deal, is there any better visibility you can kind of think about, you know, that mix between hybrid boxes and native UA Link for these Azure lead customers? 

Jitendra Mohan, CEO: 

Thanks, Blayne. Maybe let me start and then Mike can chime in on the warrant itself. So, yes, clearly, AWS announced at re:Invent that the Trainium 4, which is slated to ramp in 2027, will support UA Link, which was a very positive endorsement of UA Link, as well as support for NVLink fusion. Subsequently, AMD has also announced that their MI 500 series will also support UA Link, again in 2027. So these are two very good public announcements in support of UA Link, and there are several other discussions that are ongoing. The UA Link ecosystem is coming. We've got great availability of IP, a lot of vendor announcements, and so on. 

And so we will be ready with our UA Link solution to intercept the ramp that happens in 2027. Now for NVLink fusion, this also represents a meaningful opportunity for us. And before we jump into what the opportunities are, I do want to call out the fact that both Amazon, the hyperscaler, as well as NVIDIA have chosen Astera Labs as a partner. And that's a very important statement in terms of the trust that they place in Astera Labs. So the opportunity itself is to take the native protocol that the XPU or the ASIC speaks and translate that into NVLink. 

This is a sophisticated function, and we have a solution that we will deploy to address this. And given the fact that the solution attaches to the XPU on a one-to-one basis, we anticipate the overall revenues to be in line with the switch opportunity where we might be selling a UA Link switch. So all in all, the exact mix of how much NVLink fusion would be deployed versus a native solution would be deployed remains to be seen. But for us, the opportunity is roughly the same for both. 

My Takeaway: 

My goal is to always simplify things for my Research Members as much as I possibly can, which is why I had described about 8 months ago that Astera Labs is the best of both worlds as the company participates in both GPU workloads and custom silicon workloads from Amazon. That was echoed again this evening, which is that Astera will do well regardless of whether hyperscalers choose UALink (open standard mainly for custom silicon) or NVLink (Nvidia’s native scale-up for GPUs) 

Financials 

Q1 Revenue Guided to Increase 7.7% QoQ, Slowest in Public History 

Astera reported Q4 revenue of $270.6 million, topping estimates for $249.6 million by 8.4%. Growth continued to decelerate on both a YoY and QoQ basis, with YoY growth decelerating more than 12 points to 91.8% and QoQ growth by 2.7 points to 17.4%.  

For Q1, Astera guided for revenue between $286 to $297 million, more than 12% ahead of estimates for $260.1 million. However, this guidance points to YoY and QoQ growth continuing to decelerate, to 82.9% YoY and 7.7% QoQ. This would represent Astera’s slowest QoQ growth in its public history. As we had covered in detail last quarter, Astera’s higher-ASP Scorpio X-Series product now entered initial production in late January, likely becoming a greater tailwind to growth as its ramp progresses throughout the year. 

For the full year, Astera reported revenue of $852.5 million, up 115.1% YoY, ahead of estimates for 108.9% growth. While there was no specific guidance for 2026, current estimates for $1.18 billion in revenue, up 42.4% YoY, are likely to be revised higher in the coming days considering Q1 beat by more than $30 million.  

Soft Q1 Guide for Margins 

The one piece to nitpick would be Astera’s softer gross and operating margin guidance, though this comes with good reason – management stated that they will be accelerating R&D investments, including investments in the Scorpio X-Series roadmap, and opening a new design center in Israel to focus on next-gen scale-up fabric and R&D to address memory bottlenecks.  

For the Scorpio X-Series, management said the decision to expand the product roadmap stemmed from discussions and initial deployments with hyperscalers revealing more opportunities in the scale-up switching market, estimated to be $20 billion by 2030. This expanded X-Series roadmap will focus on new capabilities “including support for increased radix, platform-specific protocols, in-network computing, Hypercast technology, and optical connectivity.”  

Breaking this down, increased radix will help the X-Series support varying cluster sizes, from small to large-scale configurations, with support for custom interconnect protocols and tech enhancements to improve utilization and reduce GPU-to-GPU communication overhead. Including photonic switch-to-accelerator links is expected to help enable multi-rack deployments and facilitate scaling to thousands of GPUs.  

Management stated: “You know, as we spoke on the call, the TAM is much bigger than we originally expected just, you know, when we measured it, just twelve, eighteen months ago. So we are increasing our investments to pursue these opportunities. Last quarter in Q4, we did close the XScale acquisition, so now we have a full quarter in Q1. And then just recently in this quarter, we closed another AQUI hire.” 

To put it briefly, the major takeaway here is that R&D expenditures moving through 2026 may create a more persistent operating margin headwind; for example, R&D expenses rose 18.9% QoQ in Q4 to $93.8 million, or 34.7% of revenue, and could continue to outpace revenue growth as these investments unfold.  

Turning to margins: 

GAAP gross margin was 75.6% in Q4, up 1.6 points YoY but down 0.7 points QoQ. Adjusted gross margin was 75.7%. For Q1, management guided for some gross margin contraction, forecasting GAAP and adjusted gross margin to be 74%, down 0.9 points YoY and 1.6-1.7 points QoQ.  

GAAP operating margin showed slight sequential improvement in Q4, coming in at 24.7%, up 24.6 points YoY and 0.7 points QoQ, beating guidance for 22.2%. Adjusted operating margin was 40.2%, up 5.9 points YoY but down 1.5 points QoQ. 

The main critique was Q1’s operating margin guidance, as it currently points to a more pronounced contraction, likely due to the R&D ramp — GAAP operating expenses were guided to increase nearly 15% QoQ, or almost double the guided revenue growth rate, while adjusted operating expenses were guided to increase nearly 20% QoQ.   

Thus, Q1 GAAP operating margin was guided to be 19.8% at midpoint, down 4.9 points QoQ (but still up 12.7 points YoY), while adjusted operating margin was guided at 34.5% at midpoint, down 5.7 points QoQ and up only 0.8 points YoY.  

Q4 GAAP net margin was 16.6%, down 0.9 points YoY and 22.9 points QoQ, due to a $33.9 million income tax provision, whereas the two comparable quarters above witnessed income tax benefits of $14 million and $24.2 million respectively. Adjusted net margin was 38.7%, down 8.4 points YoY but up 0.4 points QoQ.  

For the full-year, Astera reported substantial GAAP margin expansion down the line. GAAP gross margin contracted 0.7 points YoY to 75.7%, though operating margin improved 49.6 points, from (29.3%) in 2024 to 20.3% in 2025. GAAP net margin improved 46.8 points to 25.7%.  

Adjusted margins also expanded nicely, but not to the same degree – while adjusted gross margin contracted 0.8 points to 75.8%, adjusted operating margin increased 9 points to 39.2%. Adjusted net margin for 2025 was 38.8%, expanding just 2.6 points.  

EPS Beat of 13.7%, Smallest on Record 

Astera reported its smallest EPS beat since going public, with its $0.58 in adjusted EPS in Q4 beating the $0.51 estimate by just 13.7%; for comparison, its second-smallest beat was in Q2 2024 at 18.9%, while the prior two quarters saw beats of >25% each. Adjusted EPS growth was 56.8%, decelerating from 113% in Q3.  

GAAP EPS was $0.25 in Q4, missing estimates for $0.30, likely due to the sharp net margin contraction related to the income tax provision. GAAP EPS growth was 78.6%. 

For Q1, Astera guided for adjusted EPS to be $0.53 to $0.54 and GAAP EPS to be $0.36 to $0.38, both figures barely ahead of estimates for $0.52 and $0.34 respectively. This would point to adjusted EPS growth accelerating slightly to 62.1%, and GAAP EPS growth accelerating to 105.6%.    

For 2025, Astera reported GAAP EPS of $1.22, up from a ($0.64) loss in 2024, while adjusted EPS was $1.84, up 119% YoY. Astera did not provide a full year guide for 2026, though considering the possibility for increased R&D to weigh some on margins and the marginal Q1 beat versus estimates, revisions are likely to be minimal from the current $2.37 for 33.1% growth.  

Cash Flows and Balance Sheet 

Cash flow margins remained strong in Q4, while Astera’s balance sheet remained healthy with zero debt and cash increasing slightly. Accounts receivable showed strong growth while inventories also rose, indicating that growth may remain strong through the initial part of 2026.  

Operating cash flow was $95.3 million in Q4 for a 35.2% margin, up 7.1 points YoY and 1.3 points QoQ. For 2025, operating cash flow was $319.3 million for a 37.5% margin, expanding 3 points YoY.  

Free cash flow was $76.6 million for a 28.3% margin, up 11.1 points YoY but down 0.2 points QoQ. For the year, free cash flow was $281.8 million for a 33.1% margin, up 7.3 points YoY.  

Accounts receivable surged nearly 94% QoQ to $83.2 million, while inventories rose more than 14% QoQ to almost $59 million, both positive signals that revenue growth is likely to remain strong considering the state of demand and hyperscaler capex plans.  

Cash and equivalents totaled $1.19 billion while debt remained zero.  

Conclusion: 

The I/O Fund considers many factors when determining how to position correctly. Frankly, the charts are picking up on market doubts from ESUN, yet the product analysis points to the setup for a second wind. Where Astera continues to stand out is that its products are qualified for both custom silicon for UALink and Nvidia deployments via NVLink, providing rare relevance across dueling platforms.  

Perhaps most importantly, Ethernet Scale-Up doesn’t weaken this position, rather the debate leads to a reinforcement on why PCIe is very difficult to displace. In a fluid and competitive space like networking, Astera breadth of customers and platforms integrations offer rare defensibility.

Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in ALAB at the time of writing and may own stocks pictured in the charts.

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Coherent is a stock that will test investors as the company has near-perfect positioning, yet the timing is taking longer than what growth investors typically look for. If I had to describe this earnings report, I would use the word “visibility” as the headline numbers will fail to impress, yet I believe the stock price will march upward as the equation of what Coherent offers + where the demand is = will eventually materialize (in 2026).  

The data center and communications segment revenue grew by 33% YoY and 11% QoQ in FQ2, accelerating from 26% YoY growth and 7% QoQ growth in FQ1 driven by strong AI demand. The Communications segment grew 44% YoY and 9% QoQ, although this was down from 11% QoQ growth and 55% YoY reported last quarter. However, the data center segment accelerated meaningfully to 14% QoQ and 36% YoY, up from 4% QoQ growth and 23% YoY last quarter. As of this quarter, data center and communications segment represents 70% of revenue. 

The company offered strong visibility metrics, such as stating book-to-bill ratio is 4X, meaning they are booking orders 4X faster than they can ship. Much of Coherent’s timing hinges on indium phosphide capacity as the company has been working to increase this capacity by moving from 3-inch wafers to 6-inch wafers, which will produce 4X the amount of chips at half the cost. The words “second half" came up frequently with management emphasizing an incoming inflection: “We expect 1.6T to ramp significantly over the coming quarters, with the early phase of the ramp driven by our EML and silicon photonics-based transceivers, followed by our 200G VCSEL-based 1.6T transceivers ramping in the second half of this calendar year.” 

In addition to the transition toward 1.6T being a catalyst, optical circuit switches (OCS) and co-packaged optics (CPO) represent additional catalysts as we move look into 2027. Although in the future, an area where Coherent could stand out is CW lasers for the incoming CPO wave in AI networking. According to management, they secured a large order from a hyperscaler. Management also emphasized their non-mechanical liquid crystal technology for OCS provides an edge, with an update on the call they currently have 10 customers in their pipeline. 

Book-to-Bill at 4X offers Important Visibility 

Coherent’s management team went to great strides to offer visibility, which helped the price stabilize after hours. In particular, the comment their data center bookings have a bill-to-book ratio of 4X was helpful: “In Q2, we experienced another step function increase in our data center bookings, with a book-to-bill ratio that exceeded 4x, as customer demand continues to increase and customers place orders further out in time, which provides us with strong visibility for the coming quarters.” 

This was asked about in the Q&A with management emphasizing again the line of sight they currently have: “I was really pleased with the acceleration of our sequential growth rate, 14% sequential growth. And then we also saw, as I mentioned in the prepared remarks, over 4x book-to-bill ratio. So just seeing incredibly strong demand, and we’re seeing bookings go further out in time than we would have in the past, which is great for us for visibility.” 

Coherent also noted that some large customers are booking 2-3 years out with long-term agreements, which guarantee customers a defined level of supply while offering a stronger growth outlook than optical networking companies have seen in the past.  

Per management: “Then the third thing I would mention with respect to visibility is, number of long-term supply agreements that we’ve either signed with customers or in the process of signing, where, you know, the LTA will provide, a guarantee to our customers for a certain amount of, supply, and in exchange, they give us a guarantee on a certain amount of demand. There’s often, some sort of financial commitment from our customers, like investment for CapEx, et cetera. I would say all those things combined, the visibility of the business is, the best it’s ever been, which gives us just kind of great confidence in terms of the go-forward growth that we’re seeing.” 

Pros/Cons of Internal Sourcing versus External Sourcing 

Coherent’s slower growth compared to peers is due to sourcing the substrates and wafers internally rather than rely heavily on external suppliers. Although this results in higher margins over time, it results in a slower near-term ramp. This manufacturing strategy could ultimately pay off given Coherent can yield more at fixed costs.  

Inevitably this is discussed at length on earnings calls given it’s a competitive differentiation versus other optical networking peers. In the opening remarks, Coherent explained they are on track to increase internal capacity by the end of the year: “For example, we significantly increased our indium phosphide production capacity in Q2, and we are executing on track to our plan to double our internal indium phosphide production capacity by the fourth quarter of this calendar year.” 

During the Q&A, management described the advantages of sourcing internally in the following way: “Another way to look at it is, any time the kind of market price of Indium Phosphide goes up, it makes our internally sourced Indium Phosphide that much more valuable, right, in terms of a differential. And then, you know, I would say in terms of our own pricing, you know, we continue to see, you know, the ability to continue to optimize pricing. I think Sherry mentioned in her prepared remarks that, some of our gross margin improvement last quarter was based on pricing optimization. We continue to see opportunity to optimize pricing, especially in a environment where, where we’re, where demand is very strong.” 

Financials 

By Royston Roche 

Organic Revenue Growth of 22% 

Coherent’s FQ2 ending December 2025 revenue grew by 17.5% YoY and 6.6% QoQ to $1.69 billion, beating estimates by 2.7%. On a pro forma basis, excluding revenue from the divested Aerospace and Defense business, which the company sold in FQ1, revenue grew by 9% QoQ and 22% YoY primarily driven by AI Datacenter & Communications demand. 

Management guided FQ3 revenue of $1.70 billion to $1.84 billion, implying a YoY growth of 18.2% and 5% QoQ at the midpoint, beating estimates by 3.5%. As per our internal proforma estimate, it implies a YoY growth of 23.8% and 6.3% QoQ in FQ3 after excluding Aerospace and Defense business revenue from the prior year quarter and also the recently sold product division based in Munich. The product business in Munich had averaged $25 million quarterly revenue and had a gross margin well below the company’s corporate gross margin. 

Management expects continued strong growth in the second half of fiscal year 2026 and throughout fiscal year 2027 based on strong datacenter and communications demand and the continued production capacity expansion along with improving demand in the Industrial segment. 

The company’s CEO and President, James Anderson said in the earnings call, “In particular, we expect continued strong sequential revenue growth in both our March and June quarters, and we expect our fiscal '27 revenue growth rate to exceed our fiscal '26 growth rate. The key growth drivers that we see over the coming quarters are growth in both 800 gig and 1.6T transceivers, growth from the ramps of new products such as OCS and CPO solutions and ongoing exceptionally strong demand in our products for DCI and scale across.” 

Segments 

Data Center and Communications Segment Revenue Growth of 33% 

The company’s data center and communications segment revenue grew by 33% YoY and 11% QoQ to $1.21 billion. Revenue growth accelerated from 26% YoY and 7% QoQ growth in FQ1 driven by strong AI demand. 

FQ2 data Center segment revenue grew by 36% YoY and 14% QoQ, accelerating from 23% YoY and 4% QoQ growth reported in FQ1. The FQ2 data center revenue growth was driven by growth in both 800 gig and 1.6T transceivers. The company is witnessing very strong AI demand and is also rapidly expanding capacity, and management expects double-digit sequential growth in data center segment in both FQ3 and FQ4.  

Management expects revenue growth in the current quarter to be driven by a combination of growth in both 1.6T and 800 gig transceivers as well as growth in the OCS systems. Coherent is witnessing strong demand for the 1.6T transceivers across multiple customers and continue to expect both 800 gig and 1.6T to grow significantly in calendar 2026. 

Coherent expects OCS revenue to grow sequentially in the coming quarters as they ramp production capacity as fast as possible to meet the rapidly growing demand. Management estimates over $2 billion of addressable OCS market in the coming years. 

Communications segment FQ2 revenue grew by 9% QoQ and 44% YoY driven by growth in data center interconnects products and in traditional telecom applications. Management expects the communications business to grow sequentially in FQ3 and FQ4. 

Industrial segment revenue was down (10%) YoY and down (3%) QoQ. On a pro forma basis, excluding the divested aerospace and defense business revenue grew by grew 4% QoQ and was flat YoY. Sequential growth in FQ2 was driven by industrial lasers and engineered materials product lines. Management expects the Industrial segment to be roughly flat sequentially in FQ3 on a pro forma basis. Looking ahead, they expect improving demand as they witnessed significant increase in orders in FQ2 from the semi-cap customers, which they expect to translate into sequential growth for the industrial business in the June quarter and the remainder of this calendar year.

Margins 

The company’s margins are improving driven by reductions in product costs, manufacturing efficiency gains, and operating leverage.  

• FQ2 gross profits grew by 22.3% YoY to $622.8 million. Adjusted gross profits grew by 20% YoY to $657.4 million with an adjusted gross margin of 39%, up 80 basis points YoY and 30 basis points sequentially and was in-line with the guide. The improvement in gross margin was driven by reductions in product input costs, efficiency gains from improved cycle times in the manufacturing process, as well as yield improvements. Pricing optimization also continued to contribute meaningfully to the gross margin expansion. The management FQ3 guide is 39.5%. 
• FQ2 operating income grew by 34.3% YoY to $184 million. Adjusted operating income grew by 26.8% YoY to $336 million with an adjusted operating margin of 19.9%, up 140 basis points YoY and up 40 basis points QoQ and was in-line with the guide. The operating margin improvement was due to operating leverage and operational efficiencies. The management FQ3 guide is 20.9%. 
• Net income grew by 41.9% YoY to $146.7 million with a net profit margin of 8.7% compared to 7.2% in the same period last year. Adjusted net income grew by 34.2% YoY to $248.2 million with an adjusted net profit margin of 14.7% compared to 12.9% in the same period last year. 

Adjusted EPS grew by 36% YoY 

FQ2 GAAP EPS grew by 72.7% YoY to $0.76, beating estimates by 10.1%. Adjusted EPS grew by 35.8% YoY to $1.29, beating estimates by 7%. 

Management has guided adjusted EPS of $1.28 to $1.48 for FQ3, implying a YoY growth of 51.6% at the midpoint and beating estimates by 4.5%. Analysts expect FQ4 adjusted EPS to grow 43.2% YoY to $1.43 and 31.3% YoY to $1.52 in FQ1. 

Cash Flow and Balance Sheet 

Coherent’s balance sheet is beginning to improve, with the company using proceeds from the divestment to pay down debt, though debt to cash remains upside down. Operating cash flow margins were also thin and free cash outflows increased due to high capex to support the strong AI demand. 

• FQ2 operating cash flow was $57.9 million or 3.4% of revenue, down from $187.4 million in the same period last year and up from $46 million in the previous quarter. 
• FQ2 free cash outflow was ($95.7 million) or (5.7% of revenue), down from $81.7 million or 5.7% of revenue in the same period last year. FQ2 capex grew by 45.3% YoY to $154 million to support the strong AI demand. Management expects capex to increase in the coming quarters to support strong expected demand in the data center and communications segments.  
• The company had debt of $3.35 billion and cash of $863.7 million at the end of the December quarter. While the debt is high, the company has taken steps to streamline its portfolio, with the $400 million sale of its Aerospace and Defense unit in early September, which it used to pay down its debt. Thereby, reducing the debt leverage ratio from 2.4x in the September 2024 quarter to the current 1.7x. The company further plans to pay down its debt by using the proceeds from the recently sold Munich product division, which should also reduce interest expenses and lower the debt leverage ratio.  

Conclusion: 

Data center revenue is accelerating with a 4X book-to-bill ratio and the 6-inch wafer supply is already at 80% of target capacity. In addition, optical circuit switches are moving now and co-packaged optics are on the way – two solutions that Coherent maintains they have significant IP compared to its competitors. 

Coherent hurries for nobody, and that discipline is evident even as the emerging 1.6T cycle is arriving earlier than expected and will be margin accretive. The company clearly has a plan given its pivot to 6-inch wafers; that plan happens to be more gradual than the market prefers to see. However, when strong visibility intersects with an in-line earnings report; strong visibility tends to win out.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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• Lumentum Q2: Capacity Constrained (and Loving It)

Lumentum is benefiting from outsized demand for its EML lasers, reaching a quarterly company record in EML laser shipments. While EMLs are largely spoken for with InP wafer fab capacity fully allocated with long-term agreements, the company is expanding its capacity with additional supply expected to come online in the second half of this calendar year.  

The transition to 1.6T is moving faster than management originally anticipated, which contributed to the beat/raise with management stating: “We achieved another quarterly company record in EML laser shipments led by 100 gig line speeds and bolstered by a ramp in 200 gig devices. Simultaneously, we expanded our footprint in next-generation architectures shipping CW lasers for 800 gig manufacturers and increased volumes of ultra-high-power laser shipments for CPO applications.” 

There are additional growth levers for Lumentum as we look further out, driven by optical circuit switches and co-packaged optics. Optical circuit switches are beginning to move the needle now with a $400 million backlog, although currently at around $10 million in revenue. In 2027, co-packaged optics (CPOs) will represent another important market for Lumentum alongside UHP chips and ELS modules will help expand the company’s serviceable addressable market.  

To learn more about upcoming networking shifts, read our Top 15 report here.our Top 15 report here. 

Increasing Capacity for H2 2026 

Management emphasized that indium phosphide wafer fab capacity is fully allocated, with the company indicating they have already delivered half of their expansion target over one quarter alone due to strong customer demand necessitating they pull forward delivery. Thus, the natural question for an investor is whether Lumentum can add more capacity. The company stated they foresee more capacity coming in the second half of the calendar year: 

“We are scaling rapidly through precision tool optimization and yield gains. This execution will help to ensure that additional capacity comes online as planned over the next two quarters and beyond. While not able to size it, we now have line of sight to a significant block of additional capacity starting in the second half of 2026 both recurrent activities in Sagamihara and better utilization of our Caswell, United Kingdom and Takao, Japan fabs.” 

200G/1.6T Ramping Faster than Expected 

Although minimal right now, 200G is ramping faster than expected, representing 5% of unit volume yet represents 10% of laser chip revenue. According to management, demand for 200G EMLs is about a quarter faster than they originally anticipated with the goal of ending the year with 25% of unit volume from this new product mix – with these seeing higher average sales prices than the 100-gig. 

Management stated the following: “Our 200-gig line speed, as we said, is actually doing a little bit better than we expected. I think on the last call, we had said that the 5% revenue of — 5% of mix would be this quarter. It was a quarter earlier than we had expected, and that's primarily because 1.6T is coming on, I think, faster than we initially anticipated, and that is heavily being driven by 200-gig EMLs.” 

This was discussed further in the call with management stating 1.6T was stronger than it was 90 days ago: 

Ruben Roy   Stifel, Nicolaus & Company, Incorporated 

Great. Just a very quick follow-up. Has anything changed with the way you guys are thinking about 800 gig versus [ 1.6T ] module mix this year one way or the other? Is it accelerated towards 1.60T for any reason in terms of volumes from a single customer or multiple customers? Or is it relatively unchanged from how you're thinking about it 90 days go? 

Michael E. Hurlston   President, CEO & Director 

Yes. 1.6T is definitely stronger than we felt than we felt 90 days ago. So 1.6T is definitely accelerating. Our 800-gig volume actually is doing better than we would have expected. So an 800-gig that what you're seeing right now from us is an acceleration in revenue on our 800-gig shipments. But in the market, to your question, Ruben, 1.6T is definitely going better. We have exposure to a couple of customers, a couple of large customers on 1.6T, and we've been surprised by how quickly they're trying to push us to deliver and their forecast to us relative to the different SKUs that we're being asked to deploy. 

OCS Starting to Move the Needle, CPOs Incoming for 2027 

Optical circuit switches are starting to move the needle. By the end of fiscal 2027, management now expects roughly $400 million in revenue, up from the $100 million originally guided—representing an incremental $300 million upside to prior expectations. 

Management stated the following on the call: 

“If you remember, you and I discussed last time, we believed our calendar Q4 would be around $100 million. It looks like it will be quite a bit higher than that, although we're not breaking up that $400 million between the two quarters. So we — it's a broad-based — there's multiple customers making up that backlog. We've talked about shipping to three customers, and that continues — but those customers are increasing their demands rather significantly. And thus, the demand on us has gone up quite appreciably. So we feel pretty good about that. I think as we enter calendar year 2027, it should go up from there in terms of what we see in our backlog and in terms of our revenue.” 

Co-packed optics are expected to contribute early 2027 with stronger contribution by year-end 2027: “An industry pivot is underway to bypass the scaling limits of copper. By late calendar 2027, we would expect our first scale-out CPO shipments, replacing longer copper connections.” 

Financials 

Revenue Growth to Accelerate to 89% in Q3 

Lumentum delivered Q2 revenue at the upper end of its guided range, yet its guidance stands out as it not only points to YoY growth accelerating almost 24 points to 89.3% YoY, but it also was a larger magnitude beat in dollar terms versus last quarter.  

Q2 revenue was $665.5 million, a modest 2% beat to estimates and in the upper end of Lumentum’s guidance for $630-$670 million. Revenue growth accelerated 7.1 points to 65.5% YoY, while sequential growth was robust at 24.7% QoQ, its fastest growth in eight years and accelerating 13.7 points.  

For Q3, Lumentum guided for revenue between $780 million and $830 million, accelerating 23.8 points to 89.3% YoY at midpoint. Sequential growth will remain strong with guidance pointing to growth of 21% QoQ at midpoint. What’s impressive here is that Lumentum’s guidance beat consensus by a larger margin than it did last quarter – at the $805 million midpoint, this would be nearly $99 million ahead of the $706.4 million estimate, whereas Q2’s guide for $650 million at midpoint beat by ~$88 million.  

Considering the scope of this raise for Q3, it’s likely that estimates for Q4, which currently are pegged at just $770.4 million, are revised much higher in the coming days/weeks. As a result, it’s likely that consensus estimates for FY26, currently at $2.64 billion, move ~8-10% higher.  

Segment Breakdown 

As we had noted in our prior analysis, Lumentum: EMLs Driving Results, CW Lasers Ramping with Q2 Guided for 22% QoQ Growth, Lumentum changed its reportable segments in fiscal Q1, dropping Cloud & Networking and Industrial Tech and transitioning to Components and Systems.  

For a brief recap, Components include laser chips, laser subassemblies, line subsystems and wavelength management subsystems, while Systems includes full stand-alone products such as optical transceivers, optical circuit switches and industrial lasers.  

Lumentum expects Components to be the cornerstone for revenue growth and profitability while Systems will scale rapidly with transceivers, OCS and other high-performance solutions.  

Components Revenue Accelerates Slightly 

Components revenue was $443.7 million in Q2, up 68.3% YoY and 17% QoQ. YoY growth accelerated 3.4 points, though QoQ growth decelerated 1.4 points from last quarter. Components accounted for 66.7% of revenue in Q2, down from 71% in Q2. 

Driving this growth were EML shipments, with Lumentum saying both 100G and 200G EMLs reached new company records. Ultra-high-power lasers for CPO continued to grow, with Lumentum outlining a broader ramp in the second half of calendar 2026, aligning with Nvidia’s Spectrum-X switch roadmap with its Vera Rubin platform.  

Lumentum also noted that Q2 saw an eighth consecutive quarter of sequential growth for narrow linewidth lasers for data center interconnect (DCI) applications, while pump lasers for scale-across and sub-sea applications reached a record. 

Systems Revenue up 43% QoQ, New Record for Transceivers 

Systems revenue saw much stronger sequential growth than Components as it is coming off a much smaller base, with cloud transceivers likely to be the main driver as optical circuit switching (OCS) is still very early in its ramp.  

Systems revenue rose 43.5% QoQ and 60.1% YoY to $221.8 million, a sharp acceleration from a (3.6%) QoQ decline and 46.5% YoY increase in Q1. This was driven by record cloud transceiver shipments.  

Lumentum did note that OCS shipments exceeded a $10 million quarterly run rate in the quarter, while manufacturing readiness is proceeding ahead of schedule as the company prepares to begin fulfilling its >$400 million OCS backlog later in 2026. 

Margins Expand Substantially, Operating Margin up 22.5 Points YoY 

Complementing the strong revenue growth is substantial margin expansion, with Lumentum showing GAAP operating margin expand 22.5 points YoY to nearly crack into double digit territory. Lumentum’s cost profile also shows that operating margin expansion will continue as costs rise at a much slower pace than revenue growth. 

Lumentum reported solid expansion in gross margins in Q2, with GAAP gross margin up 2.1 points QoQ and 11.3 points YoY to 36.1%, and adjusted gross margin up 3.1 points QoQ and 10.2 points YoY to 42.5%.  

However, operating leverage was quite prevalent and visible in the quarter as opex rose just 0.6% QoQ and 16.3% YoY. This, combined with gross margin expansion, drove significant expansion in operating margins on a YoY and QoQ basis.  

GAAP operating margin in Q2 was 9.7%, up 8.4 points QoQ and 22.5 points YoY, while adjusted operating margin was 25.2%, up 6.5 points QoQ and 17.3 points YoY (and ahead of guidance for 20-22%). Lumentum forecast this operating margin to continue at a similar rate, projecting adjusted operating margin of 30-31% in Q3, up 5.3 points QoQ and 19.7 points YoY. 

To note, Lumentum is well ahead of its target financial model, which called for >20% adjusted operating margin and 39-42% adjusted gross margin at a $750 million/quarter. Lumentum is already above both metrics on $665 million/quarter base.  

Net margins followed, with GAAP net margin expanding 11 points QoQ and 26.9 points YoY to 11.8%. Adjusted net margin expanded 5.4 points QoQ and 14.1 points YoY to 21.6%. An important takeaway here is that this AI-driven growth is driving strong earnings leverage for Lumentum, as adjusted net margin was single-digits just three quarters ago.  

Adjusted EPS Beats by 18%, Q3 Guided 40% Above Estimates 

As just mentioned, this AI growth and margin expansion is driving visible earnings leverage for Lumentum. Not only did adjusted EPS beat estimates by 18% in Q2, but Lumentum’s Q3 guide was more than 40% above estimates, signaling >290% growth will be maintained for another quarter.  

Q2 GAAP EPS was $0.89, up from just $0.05 in Q1 and beating the $0.50 consensus estimate by 78%. Adjusted EPS was $1.67, up 51.8% QoQ and 297.6% YoY, and beating the $1.40 estimate by 18.4%. 

For Q3, Lumentum guided for $2.15 to $2.35 in adjusted EPS, pointing to YoY growth of 294.7% and QoQ growth of 34.7%. At midpoint, this represented a 40.6% beat to the consensus estimate of $1.60.  

Combined, Q3 and Q4 adjusted EPS came in $0.91 ahead of estimates, and if Q4 is to see a similar ~$0.60 to $0.70 upward revision to match Q3’s beat, full-year adjusted EPS estimates could move to around the $7.50 range, up from the current $5.92 prior to the report. 

Cash Flows and Balance Sheet 

Cash and equivalents increased slightly to $1.16 billion while debt was $3.29 billion.   

Inventories were $570.4 million, up more than 7% QoQ, while accounts receivable surged nearly 23% QoQ (again) to $376.8 million, supporting the upcoming product ramps over the coming quarters.  

Conclusion:

AI networking is entering a new phase, one where silicon photonics plays a much larger role alongside system-level shifts such as optical circuit switches and co-packaged optics.  

The goal is to continually optimize for AI workloads rather than rely on traditional networking as ever-expanding AI clusters seek speed, lower latency and reduced power consumption. Pluggable optics work well enough today but are quickly becoming a limiting factor as power and port density doesn’t scale well with traditional optics. This dynamic is pushing hyperscalers to rethink network architectures, and positions Lumentum well, as its solutions help future-proof AI networks for the years ahead.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in LITE at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

• Meta Q4 Earnings: A New Era Driven by AI Agents
• Palantir Q4: Highest Growth as Public Company; US Commercial to Accelerate
• The I/O Fund’s Top 15 Stocks for Q1 2026
• Lumentum: EMLs Driving Results, CW Lasers Ramping with Q2 Guided for 22% QoQ Growth

AMD’s data center segment revenue increased 39% year-over-year to a record $5.4 billion, led by Instinct GPUs and EPYC CPUs. Of this, $390 million was from MI308 sales to China, which means the DC segment reported closer to $5.0 billion in revenue. That number is worrisome to the market because it would mean QoQ growth of 15% for Q4, down from 34% QoQ growth in Q3. This would also translate to YoY growth of 29% – which is not to grab the Street’s attention given Broadcom is in the 100% range on ASICs and Nvidia is reporting about 12X higher on a quarterly basis and 50X higher revenue on an annual basis.

The guide also implies a deceleration from $10.3 billion this quarter to $9.8 billion in the upcoming quarter. Although this beats the Street expectations of $9.37 billion, it’s not the beat/raise tempo being set from other AI stocks right now.  

However, there were some bright spots on the call, primarily management stating to expect 60% growth in the data center over the next few years – including 2026. This hint is important as it communicates a strong acceleration into the second half of 2026 given we are starting out at data center growth of 39%, which is what we’ve been expecting.  

Per my last earnings writeup: “AMD Q3: The Catalyst is Expected in H2 2026," which stated, “AMD is a stock where I’ve been intentional about managing expectations. The upside is compelling — as the second place in data center GPUs is wide open. Yet for those who have followed our coverage, the timing has always been key: meaningful execution in AI accelerators is not expected to materialize until the second half of 2026. In other words, the long-term opportunity is substantial, but patience remains part of the thesis.” 

I could have simply republished last quarter’s write-up except for this one important update that offers 3-5 year visibility; rare for any management team but especially AMD. 

Data Center to see 60%+ Growth for Next 3-5 Years 

Buried in the call was a rather strong statement for this otherwise-conservative management team that AMD is “well positioned” to grow data center revenue by more than 60% annually over a 3-5 year time frame: 

“With the launch of MI400 series and Helios representing a major inflection point for the business, as we deliver leadership performance and TCO at the chip compute tray and rack level. Based on the strength of our EPYC and Instinct road maps, we are well positioned to grow data center segment revenue by more than 60% annually over the next 3 to 5 years, and scale our AI business to tens of billions in annual revenue in 2027.” 

Given the strength of the comment, an analyst asked about the comment on the call and if the 60% applies to 2026 with management replying this is certainly possible: 

“We're not obviously guiding specifically by segment, but the long-term target of, let's call it, greater than 60% is certainly possible in 2026.” 

There have been rumors that AMD may be late in delivering the MI400s, however, that was dismissed today on the call as management reiterated, they are on time for H2:

Later, the CFO also confirmed margins would improve by Q4 based on the launch: “So all those tailwinds we're seeing, we continue to see in the next few quarters. And MI450 ramp, of course, in Q4, our gross margin will be driven largely by mix. And I think we'll give you more color when we get there. But overall, we feel really good about our gross margin progression this year.” 

There was more color provided on timing by CEO Lisa Su: 

“But as we get into the second half of the year, the MI450 is really an inflection point for us. So that revenue will start in the third quarter, but it will ramp significant volume in the fourth quarter as we get into 2027. So that gives you a little bit of sort of what the data center ramp looks like throughout the year.” 

Later she reiterated this again when asked for specific timing: “And our expectation is that we will be on track for our second half launch.” 

However, I do expect some analysts to be turned off by the company choosing to not breakout Instinct GPU revenue from EPYC revenue in the data center segment. That would imply GPU revenue is pretty low still. That is not too relevant to our thesis, yet if you see negative notes coming out, it’s due to lack of visibility in the current size of the AI accelerator business. 

The only visibility provided was a mention of “tens of billions” in revenue in 2027.

Aaron Rakers   Wells Fargo Securities 

Lisa, at your Analyst Day back in November, you seem to kind of endorse the high $20 billion AI revenue expectation that was out there on the Street for 2027. I know today you're reaffirming the path to strong double-digit growth. So I guess my question is, can you talk a little bit about what you've seen as far as customer engagements, how those might have expanded? I think you've alluded to in the past multiple multi-gigawatt opportunities. Just any — just double-click on what you've seen from the MI455 and Helios platform from a demand shaping perspective as we look into the back half of the year? 

Lisa Su   Chair, President & CEO 

Yes. Sure, Aaron. Thanks for the question. So first of all, I think the MI450 Series development is going extremely well. So we're very happy with the progress that we have. We're right on track for a second half launch and beginning of production. And as it relates to sort of the shape of the ramp and the customer engagement, I would say the customer engagements continue to proceed very well. We have obviously a very strong relationship with OpenAI, and we're planning that ramp starting in the second half of the year going into 2027. That is on track. We're also working closely with a number of other customers who are very interested in ramping MI450 quickly, just given the strength of the product, and we see that across both inference and training. And that is the opportunity that we see in front of us. So we feel very good about sort of the data center growth overall for us in 2026. And then certainly going into 2027, we've talked about tens of billions of dollars of data center AI revenue, and we feel very good about that. 

Financials: 

By Royston Roche 

Q4 Revenue Grew by 34% 

AMD’s Q4 revenue grew by 34.1% YoY and 11.1% QoQ to $10.27 billion, beating estimates by 6.2%. Revenue growth was primarily driven by continued growth in the Data Center segment from both server and data center AI business, as well as a return to YoY growth in the Embedded segment. However, the company’s revenue this quarter included approximately $390 million from MI308 sales to China and excluding this revenue since it was not included in the guidance would yield only a 2.2% beat, the smallest in the last four quarters. 

Management guided Q1 revenue of $9.8 billion at the midpoint, implying a YoY growth of 31.8% YoY and down (4.6%) QoQ and the guidance includes about $100 million of MI308 chip sales to China. It is primarily driven by growth in the Data Center and Client and Gaming segments and modest growth in the Embedded segment. Although this beats the Street expectations of $9.37 billion, it’s not the beat/raise tempo being set from other AI stocks right now.   

Full year 2025 revenue grew by 34.3% YoY to $34.6 billion. Looking ahead, analysts expect revenue to grow 33.2% YoY to $46.1 billion in 2026 and accelerate to 37.9% YoY to $63.6 billion in 2027. 

Q4 Data Center Revenue Grew by 39% YoY 

The company’s Data Center segment revenue grew by 39% YoY and 24% QoQ to a record $5.4 billion, led by accelerating Instinct MI350 Series GPU deployments and server share gains. In server, adoption of fifth gen EPYC CPUs accelerated in the quarter, accounting for more than half of the total server revenue. AMD had record server CPU sales to both cloud and enterprise customers in the quarter and exited the year with record share. 

In cloud, hyperscaler demand was very strong as North American customers expanded deployments. EPYC-powered public cloud offerings grew significantly in the quarter with AWS, Google and others launching more than 230 new AMD instances. In the enterprise, AMD is witnessing a meaningful shift in EPYC adoption, driven by leadership performance, expanded platform availability, broad software enablement, and increased go-to-market programs. Looking ahead, management expects server CPU demand to be very strong as hyperscalers are expanding their infrastructure to meet growing demand for cloud services and AI while enterprises are modernizing their data centers. 

The company delivered record Instinct GPU revenue in the fourth quarter, led by the ramp of MI 350 Series shipments. In addition to the partnership entered in October with OpenAI to deploy 6 gigawatts of Instinct GPUs, AMD is in active discussions with other customers on at-scale multiyear deployments starting with Helios and MI450 later this year. AMD expanded the ROCm ecosystem in the fourth quarter, enabling customers to deploy Instinct faster and with higher performance across a broader range of workloads. The company remains on track to launch its MI500 chips in 2027 and expects to deliver a major increase in AI performance.

Client and Gaming Segment revenue grew by 37% 

Q4 client and gaming segment revenue grew by 37% YoY and down (3%) QoQ to $3.94 billion. Client segment revenue grew by 34% YoY and 13% QoQ to $3.1 billion. Management highlighted the strong demand for Ryzen processors for laptops and PCs, which have been gaining market share against Intel. 

In gaming, revenue grew by 50% YoY and down (35%) QoQ to $843 million. Management said in the Q4 earnings call, “Semi-custom sales increased year-over-year and declined sequentially as expected. For 2026, we expect semi-custom SoC annual revenue to decline by a significant double-digit percentage as we enter the seventh year of what has been a very strong console cycle.” 

Embedded revenue returned to growth in Q4. It grew by 3% YoY and up 11% QoQ to $950 million, up from the YoY decline of (8%) and up 4% QoQ in Q3 2025. 

Margins 

The company’s profits are growing. However, near term margins are negatively impacted by higher operating expenses to support strong future AI opportunities. Management expects margins to improve by the end of Q4 due to favorable product mix, particularly the ramp of MI450 chips. 

• Q4 gross profits grew by 44% YoY and 17% QoQ to $5.58 billion. Adjusted gross profits grew by 41% YoY and 17% QoQ to $5.86 billion. Adjusted gross margin was 57%, and it benefitted from the $360 million previously written down MI308 inventory reserves. Excluding the inventory reserve release and MI308 revenue from China, gross margin would have been 55%, up 100 basis points YoY and QoQ, driven by favorable product mix. Management has guided 55% adjusted gross margin in Q1 
• Q4 operating income grew by 101% YoY and 38% QoQ to $1.75 billion. Operating margin improved by 600 basis points YoY and 300 basis points QoQ to 17%. Adjusted operating income grew by 41% YoY and 28% QoQ to $2.85 billion. Adjusted operating margin improved by 200 basis points YoY and 400 basis points QoQ to 28%. Management has guided an adjusted operating margin of 24% in Q1. The company’s near-term margins are negatively impacted by higher operating expenses to support strong future AI opportunities. 
• Net income was up 213% YoY to $1.5 billion or 15% of revenue, up 900 basis points YoY. Adjusted net income was up 42% YoY to $2.5 billion or 25% of revenue, up 200 basis points YoY. 

Adjusted EPS grew by 40% 

The company’s Q4 adjusted EPS grew by 40.4% YoY to $1.53 primarily driven by operating leverage, beating estimates by 16%. 

Analysts expect Q1 adjusted EPS to grow 27.6% YoY to $1.22 and 185.8% YoY to $1.37 in Q2 2026. 

Cash Flow and Balance Sheet 

The company’s cash flows are growing primarily driven by higher revenue and profits.   

• Q4 operating cash flow grew by 77% YoY to $2.3 billion with an operating cash flow margin of 22%, up 500 basis points YoY. 
• Q4 free cash flow grew by 91% YoY to $2.1 billion with a free cash flow margin of 20%, up 600 basis points YoY. 
• The company had cash and short-term investments of $10.5 billion, up from $7.24 billion in Q3. While debt remained the same at $3.22 billion.  
• Inventories rose 8% QoQ to $7.92 billion to support the strong future AI demand.

Conclusion: 

There was no big reveal in AMD’s earnings report, yet interesting enough, that has been the case for years and yet the stock is starting to see movement as AMD outpaced Nvidia’s returns last year by 3X. In my most recent Top 15 AI Stocks report, I highlighted how the element of surprise can work in AMD’s favor. Most importantly, AMD’s management team remains among the most conservative in the space, which makes it notable that we’re already hearing expectations for roughly 60% growth in the data center segment for 3-5 years. That’s a nice clue for what may be on the horizon.

Royston Roche, Equity Analyst at I/O Fund contributed to this analysis.

Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in AMD at the time of writing and may own stocks pictured in the charts.

Recommended Reading:

• Meta Q4 Earnings: A New Era Driven by AI Agents
• Palantir Q4: Highest Growth as Public Company; US Commercial to Accelerate
• Lumentum Q2: Capacity Constrained (and Loving It)
• The I/O Fund’s Top 15 Stocks for Q1 2026