AMD's Reality Check: Why Strong Earnings Couldn't Prevent a Selloff
Semiconductor giant $Advanced Micro Devices(AMD)$
Three Things to Watch
Q1 Guidance Misses Expectations; The Performance Unlock Awaits the MI450 in H2
At first glance, AMD's Q4 2025 metrics seem to beat market expectations significantly. However, once you strip out the revenue from the China-specific MI308, the beat is actually quite modest. Furthermore, AMD's guidance for Q1 2026 failed to show the kind of sequential surge seen in AI memory stocks like $Micron Technology (MU.US)$ or $SanDisk (SNDK.US)$ . This is particularly jarring given that AMD's current valuation premium is far higher than competitors like $NVIDIA (NVDA.US)$ and $Broadcom (AVGO.US)$ , acting as the main trigger for the stock price volatility.
AMD expects Q1 revenue of $9.8 billion (including $100 million from the China MI308), representing 32% YoY growth but a 5% decline QoQ. Non-GAAP gross margin is projected at 55%, up 1.3 percentage points YoY but down 2 percentage points QoQ. Non-GAAP net income is forecast at $2.07 billion, up 32% YoY but down 18% QoQ.
Breaking down the Q1 guidance by segment, the Data Center business (Server CPUs, GPUs, FPGAs) is expected to grow both YoY and QoQ, with Server CPUs and GPUs specifically showing sequential growth. The Client business (Laptop and Desktop CPUs) and Gaming business (Consoles, Desktop Graphics) are expected to grow YoY but decline sequentially due to seasonality. The Embedded business (Xilinx FPGAs, Tesla automotive chips) sees modest YoY growth but a seasonal sequential decline.
Viewed this way, AMD's short-term growth appears limited. The market needs to wait for the volume ramp-up of the MI450 series in the second half of the year. Management expects the MI450 series to begin contributing revenue in Q3, with a massive volume ramp officially starting in Q4.
EPYC CPUs Shine, Yet Management Remains Coy on Full-Year AI Revenue Guidance
AMD's Data Center revenue reached $5.38 billion this quarter, up 39% YoY, with Server EPYC CPUs still contributing the lion's share. Adoption of the Zen5 EPYC Turin CPU accelerated this quarter, accounting for over half of total Server CPU revenue (approximately $1.5 billion), while demand for the Zen4 EPYC Genoa CPU remained robust. Server CPU revenue from cloud and enterprise customers hit a record high this quarter, as did market share.
Management noted very strong demand for the 2nm Zen6 EPYC Venice CPU slated for mass production this year and believes the overall Server CPU TAM (Total Addressable Market) will see strong double-digit growth in 2026, validating the market's view on robust server CPU demand.
In the Data Center GPU segment, revenue hit a new high driven by the MI350 series ramp-up. This included $390 million in recognized revenue from the China-specific MI308; even excluding the MI308, the segment maintained sequential growth. Beyond the multi-generational partnership with OpenAI (6GW of GPUs), AMD is in active discussions with other customers regarding large-scale, multi-year deployments based on Helios and MI450 starting later this year.
The second half of the year will be a critical inflection point with the MI450. Related revenue will begin in Q3, but significant volume will not arrive until Q4. The MI500 series is expected to enter mass production in 2027, featuring HBM4E, the CDNA6 architecture, and a 2nm process. Management reiterated their goal to achieve a compound annual growth rate of over 60% for Data Center revenue over the next 3 to 5 years, aiming for tens of billions in annual revenue by 2027.
Although CEO Lisa Su still did not provide specific AI revenue guidance for 2026 (what are they worried about?), she did guide for Data Center revenue growth of over 60% for 2026. However, the market understands that this deliberately blurs the distinction between CPU and GPU guidance.
Rising Memory Costs Drag Down 2026 PC TAM; Client & Gaming Margins Slide
AMD has been steadily eroding $Intel (INTC.US)$ 's market share in the PC sector in recent years. Q4 desktop CPU revenue hit a record high for the fourth consecutive quarter, and Ryzen terminal shipments in the notebook segment also reached a new high. Terminal shipments for commercial notebooks and desktop Ryzen CPUs grew more than 40% YoY. However, the combined operating margin for AMD's Client & Gaming segments fell to 18% in Q4, and like Intel, has yet to return to 2021 highs.
As the console cycle enters its seventh year, the semi-custom business within the Gaming segment is expected to see a significant decline in 2026. Management also indicated that rising memory prices will lead to a slight decline in the 2026 PC TAM, with the second half of the year likely showing "non-seasonal weakness" relative to the first half. Nevertheless, management expressed confidence that the company's PC business can grow even in a declining market environment, primarily due to a focus on the enterprise sector.
Q4 Key Financial Highlights
– Revenue: $10.27 billion, up 34% YoY and 11% QoQ. This includes $390 million in recognized revenue from the China MI308. Excluding this, revenue was $9.88 billion, which still beat the market consensus of $9.65 billion and prior guidance of $9.6 billion.
– GAAP Gross Margin: 54.3%, up 3.6 percentage points YoY and 2.6 percentage points QoQ, beating the consensus estimate of 53.1%.
– Non-GAAP Gross Margin: 57%, up 2.9 percentage points YoY and 3 percentage points QoQ, beating the consensus and guidance of 54.5%. This was primarily driven by the China MI308 revenue and the impact of previously reserved inventory sales. Excluding these impacts, Non-GAAP gross margin was 55%.
– GAAP Operating Income: $1.75 billion, up 101% YoY and 38% QoQ, beating the consensus of $1.65 billion.
– Non-GAAP Operating Income: $2.85 billion, up 41% YoY and 28% QoQ, beating the consensus of $2.47 billion.
– GAAP Net Income: $1.51 billion, up 213% YoY and 22% QoQ, beating the consensus of $1.34 billion.
– Non-GAAP Net Income: $2.52 billion, up 42% YoY and 28% QoQ, beating the consensus of $2.18 billion.
Q4 Revenue Breakdown by Platform
– Data Center (Server CPUs, GPUs, FPGAs): Revenue was $5.38 billion, up 39% YoY. Excluding the China MI308 revenue, it was $4.99 billion, slightly above the consensus of $4.97 billion. Operating income was $1.75 billion. Thanks to the MI308 impact, operating margin rose to 33%, making it AMD’s most profitable business this quarter.
– Client & Gaming: Client revenue (Notebook/Desktop CPUs) was $3.1 billion, up 34% YoY, beating the consensus of $2.89 billion. Gaming revenue (Consoles/Desktop Graphics) was $840 million, up 50% YoY, missing the consensus of $860 million. Combined operating income was $730 million, up 46% YoY, but operating margin declined 3 percentage points sequentially to 18%.
– Embedded (Xilinx FPGAs, $Tesla (TSLA.US)$ Chips): Revenue was $950 million, up 3% YoY, missing the consensus of $960 million. Operating income was $360 million, down 1% YoY. Operating margin stood at 38%, remaining AMD's highest margin business.
Summary
In short, market expectations for AMD were simply too high. Investors were hoping for an Nvidia-style or memory-sector-style sequential explosion in the AI business. However, that reality requires waiting for the volume ramp of MI450 orders from OpenAI and $Oracle (ORCL.US)$ in the second half of the year. The market currently underestimates AMD's dependence on these OpenAI orders.
That said, the EPYC Server CPU business continues to act as the stabilizer for AMD's performance by eating into Intel's market share. Given that competitor $Intel (INTC.US)$ is constrained by its own production capacity, this presents a golden opportunity for AMD. To a large extent, this CPU dominance will determine whether AMD can smoothly navigate the earnings "gap period" before the MI450 series fully ramps up.
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