AMD reports after the bell tomorrow. Analysts expect revenue to grow 22% YoY to $7.53 billion and adjusted EPS to grow 41.1% YoY to $1.09. The company’s data center and client segments have performed well in Q3, with the Data Center segment growing 122% and the Client segment growing by YoY. The gaming segment and embedded segments have been headwinds, yet in the recent Barclays Conference, management said that “they (headwinds) are behind us when we look ahead of 2025.”
Management’s AI revenue guide for 2024 is to exceed $5 billion, a $500 million increase announced during Q3 results. Investors will be looking for the 2025 AI revenue guide and commentary in the earnings call. The current consensus estimates for 2025 is about $9.5 billion in AI revenue.
AMD stock underperformed YTD till the news of DeepSeek came in, as analysts had reduced estimates due to the expected lukewarm response for the new MI325 chips. However, AMD fared better during the last Monday’s sell-off than other semiconductors. We’ve discussed key price levels in the Advanced webinars as of late, and right now, AMD is holding the support laid out months ago.
AMD is at the forefront of integrating the DeepSeek-V3 model on Instinct MI300X GPUs and is optimized for AI inferencing, which is positive for the stock. It also supports our thesis that Nvidia owns training, while AMD will compete on inference by lowering costs for inference, specifically. Although DeepSeek is not a death knell for Nvidia, it foreshadows that eventually cost will be at the forefront of AI development and Nvidia’s pricing power will not sustain forever.
AMD’s management has been especially clear that the MI350 chips based on new CDNA-4 architecture is the release they are most excited about with a 35X increase in performance compared to CDNA-3. Again, AMD’s thesis is not about training models, it’s about running them at the edge where cost combined with speed will take the reins as opposed to Nvidia’s big compute muscles in the data center. Nvidia will compete on inference too, but it’ll be this market that matters most for AMD’s AI story.
The PC market is mired in concerns over tariffs, as the idea is PCs that source parts in China will need to pass the cost of tariffs onto consumers. AMD’s stock price has clearly been affected by these concerns. With that said, AMD is currently the leading AI PC company. Consider that last quarter, the Zen 5 Ryzen processors drove Client revenue up 29% YoY and up 26% QoQ to $1.88 billion while competitor Intel was flat. However, Nvidia’s Project Digits and RTX 5090 GPU laptops are set to defy all odds with an order of magnitude higher TOPS. Therefore, it comes down to costs and how much performance is needed (as will be the ongoing theme between these two competitors).
Similar to last quarter (and last half of the year), industry analysts are showing a decline in the mid to high single digits QoQ for PC data, yet MoM for December was stronger than expected due to seasonality in both the United States and Chinese New Year.
Our conclusion to the post-earnings last quarter called out tariffs as a primary reason for the weak price action. It’s not clear if the tariff story is already priced into AMD’s stock price, but it could already be priced in, so keep an eye out for that outcome. Notably, the question of when a stock bottoms is not an easy one to answer. However, we’ve been tracking this company quite closely and it’s our hope the stock has already bottomed or will bottom very soon. The price has acted accordingly by holding support in the $110 to $114 range. Therefore, how low is too low for AMD’s stock price, given 22% of its revenue is already from AI? This is a separate question than when will AMD effectively compete with Nvidia, on a path to 10% or more of the GPU market? The answer is that often price will bottom first.
Revenue
Management provided a soft Q4 revenue guide of $7.5 billion, representing a YoY growth of 21.6% at the midpoint due to headwinds in gaming and embedded segments. However, management had hinted during the recent Barclays Conference that these headwinds are now behind when we look into 2025.
- Q3 revenue grew by 17.6% YoY to $6.82 billion. Data center drove Q3’s growth, while Client revenue rebounded significantly, offsetting continued weakness in gaming and embedded.
- Analysts expect Q4 revenue to grow 22% YoY to $7.53 billion and accelerate to 28.2% and 28.6% in the subsequent two quarters. Analyst estimates have come down after the company’s soft guidance and also due to the expected lukewarm response for the MI325 chips.
- Looking further out, revenue growth will accelerate from the expected 13.1% growth in 2024 to 25.6% growth to $32.2 billion in 2025 and 23.4% growth in 2026.
Segments
The company’s Data Center and Client segments showed strong growth in Q3. While Gaming and Embedded segments presented headwinds, management indicated at the recent Barclays Conference that these challenges are expected to be resolved as the company looks toward 2025.
Data Center
Q3 Data Center revenue grew by 122% YoY and 25% QoQ to $3.55 billion, driven by strong demand for AMD Instinct GPUs and EPYC server CPUs. Zen 5 Turin was launched in October 2024 and will help support data center sales in 2025. The MI325X chips were launched in October with increased memory capacity and bandwidth, with AMD stating it offers 20% higher inferencing than the H200.
Regarding the MI300 AI accelerators, Meta and Microsoft are large customers due to TCO advantages (total cost of ownership). Management also offered statements about RocM’s progress, stating that foundational support is growing and performance gains are improving by 2.4X.
The company’s launch of MI350 chips in the second half of 2025 should be a significant catalyst as the management believes that the chips have the largest generational increase in AI performance, they have ever produced. Management expects sequential growth in Data Center revenue in Q4 driven by the expected strong demand for Instinct, EPYC, and Ryzen processors.
Data Center operating margin improved to 29% compared to 19% in the same period last year.
Client Segment
Client segment revenue grew by 29% YoY and 26% QoQ to $1.88 billion in Q3, driven by strong demand for the Zen 5 Ryzen processors. Management expects client segment revenue to grow sequentially in Q4.
The PC market has been sluggish. AMD could fare better in the coming quarters due to its strong line of AI PCs. AMD said its chips will be used by Dell for the first time in PCs sold to businesses. AMD also unveiled its new Ryzen AI Max chips, offering up to 90% faster performance vs predecessors, delivering the highest level of performance available in premium thin and light notebooks. Further, it announced a new 9000 series of desktop computer processors that should also help to propel the revenue in 2025.
The client segment operating margin improved to 15% in Q3 from 10% in the same period last year.
The PC market has been sluggish. AMD could fare better in the coming quarters due to its strong line of AI PCs. Citi analyst said that the December notebook shipments increased 8% MoM due to a pull in demand ahead of Chinese New Year and potential tariffs. Notebook shipments were down (-7%) QoQ and were better than the company’s estimates of (-8%) decline, though below the normal season gain of 2%. Citi expects notebook shipments to decrease (-10%) sequentially in Q1, above the normal (-14%) decline.
Gaming
Gaming revenue declined by (-69%) YoY and (-29%) QoQ to $462 million in Q3 as semi-custom sales declined due to reduced inventory by Microsoft and Sony. Management expects modest sequential growth in Q4.
Operating margin declined to 2% compared to 14% in the same period last year.
Embedded
Embedded revenue declined by (-25%) YoY and up 8% QoQ to $927 million. Management expects modest sequential growth in Q4. Operating margin declined to 40% compared to 49% in the same period last year.
AI Revenue
Management provided an AI revenue guide for 2024 that is to exceed $5 billion, a $500 million increase announced during Q3 results. Investors will be looking for the 2025 AI revenue guide and commentary in the earnings call. The current consensus estimate for 2025 is about $9.5 billion. Analysts have reduced estimates due to the expected lukewarm response for the new MI325 chips.
Wolfe Research estimates data center GPU revenue in the range of $1.5 billion to $2.0 billion for 4Q and $7 billion for CY2025, lower than the prior estimate of $10.8 billion. For Q1 2025 they estimate $1.75 billion and flat quarterly growth for the rest of the year. KeyBanc analyst also trims estimates and expects $10 billion revenue in 2025. Loop Capital has reduced estimates from $10 billion to $8 billion. HSBC has reduced to $8.1 billion from $12.3 billion. Management AI commentary is very crucial to soothe the markets, given that MI350 chips are expected to be released in the second half of 2025.
In December, AMD invested in Vultr, an enterprise Cloud infrastructure company and a competitor of DigitalOcean. Vultr uses AMD’s graphic processing units in its data centers.
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.”
The company’s margins are improving with a higher mix of data center revenue and operational efficiencies. The company also announced in November that they are planning to reduce about 4% of its workforce to focus on better growth opportunities.
Margins are expected to improve in 2025. The growth in data center revenue is the largest driver for margin improvement, including both CPU and GPU business and the expansion of the enterprise server business also has a tailwind on the gross margins. The gradual improvement of the Embedded business will also improve margins. On the other hand, the client business expansion will be a headwind due to the higher concentration of consumer business, which has margins below the corporate average.
- Q3 gross margin was 50% compared to 47% in the same period last year, driven by strong growth in Data Center revenue.
- Adjusted gross margin was 54% compared to 51% in the same period last year. Management guide for Q4 is 54% compared to 51% in the same period last year.
- The adjusted operating margin also improved to 25% compared to 22% in the same period last year, driven by operating leverage. Management guide for Q4 is 27% compared to 23% in the same period last year.
- Q3 net income was $771 million or 11% of revenue compared to $299 million or 5% of revenue in the same period last year. Adjusted net income was $1.50 billion or 22% of revenue compared to $1.14 billion or 20% of revenue in the same period last year.
EPS
The company’s Q3 adjusted EPS grew by 31% YoY and 33% QoQ to $0.92, which was helped by higher data center revenue. Analysts expect strong growth in the coming quarters. However, estimates have been coming down as analysts are cautious due to the expected lukewarm response for MI325 chips.
- Analysts expect adjusted EPS to grow 41.1% YoY to $1.09 in Q4 and accelerate to 53.3% growth to $0.95 for Q1.
- Looking further out, analysts expect adjusted EPS to grow 49.8% YoY to $4.98 in 2025, accelerating from the expected 25.4% growth in 2024. For 2026, analysts expect adjusted EPS to grow 39.1% YoY to $6.92.
Cash Flows and Balance Sheet
Cash flows are improving and have room for further improvement due to the expected better bottom line in 2025.
- Q3 operating cash flow was $628 million or 9% of revenue compared to 7% of revenue in the same period last year.
- Q3 free cash flow was $496 million or 7% of revenue and 9% excluding certain nonrecurring payments compared to 5% in the same period last year.
- The company had cash and short-term investments of $4.54 billion and debt of $1.72 billion compared to $5.34 billion and $1.72 billion in the same period last year. The company paid $548 million for the previously announced acquisition of Silo AI and repurchased shares worth $250 million in Q3.
Valuation
The company is trading at a P/E ratio of 105 and a forward P/E ratio of 23.5.
P/S ratio is 7.8 and a forward P/S ratio of 5.9 compared to the five-year average of 8.9.
Conclusion
If I were to use my crystal ball, I think AMD’s stock price will bottom well before the cloudy (murky) narrative from the Street clears. The company has 22% in GPU revenue today, and if analyst estimates are correct, then the company will end the year with 30% in GPU revenue. This does not include AI revenue from AI PC sales, which are growing steadily QoQ, and the $9.5 billion analyst estimates on AI don’t include any upward surprise impact from AMD’s upcoming new architecture for H2 2025. The new architecture will undoubtedly be aimed at speeding up real-time throughput as cheaply as possible as AMD gathers its strength against a far more capable competitor than Intel ever was. Yet, cheap is the keyword here, as AMD’s margins would likely expand based off its pricing, where Nvidia’s could contract when the inference market truly takes off (this is further off once inference overtakes the training market). This stuff is nuanced for AI investors, so be prepared to hear a lot more details from the I/O Fund as we go along.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
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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