Advanced Micro Devices Inc (AMD) USD0.01

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AMD’s second quarter sales rose 32% to $7.7bn, beating expectations. Growth was led by a 69% rise in Client and Gaming segment sales to $3.6bn, followed by a 14% rise in Data Center revenue to $3.2bn (slightly lower than expected).

Underlying operating profit was down 29% to $897mn, largely due to an $800mn charge booked against inventory currently blocked from being sold in China.

Free cash flow more than doubled to $1.2bn and net cash stood at $2.6bn. The company repurchased $478mn of its own shares in the period.

AMD expects third-quarter revenue of around $8.7bn and a gross margin of approximately 54%, both ahead of prior expectations.

The shares were down 6.3% in after-hours trading.

Our view

AMD delivered a strong quarter on the face of it, with revenue and profit ahead of expectations. But the beats were driven by business units that investors aren’t really focused on, and the more important AI story fell short of lofty expectations.

AMD designs high-performance computer chips for laptops, game consoles, and data centres. The data centre space holds the key to future growth. AMD is looking to compete with the market leader, NVIDIA, to design the chips that make AI a reality.

New and more advanced chips are coming online, though they’re still unlikely to be on the same technical level as NVIDIA. Still, we think the market will be large enough for AMD to capture demand as a second option, even if its chips aren’t quite top tier.

There’s already been a decent sized order by Oracle to build out a new data centre on the new chips, which could be a proof point that AMD’s latest technology can deliver good performance.

Expectations are sky high, and research and development costs are ramping up to try and deliver an attractive AI product. This is a necessary use of cash, but margins are already lower for AI chips, so we’ll be keeping an eye on how this evolves as AI products become a larger part of the mix.

The China story is important, too, and AMD took an $800mn hit this quarter as export restrictions remained in place. That’s in part why growth from the data centre business was underwhelming. Licenses are expected to be approved, but AMD’s roadmap for getting these agreed upon and ramping production sounds a little uncertain.

AI demand is likely to be a key driver of growth, and the area investors are most focused on. But AMD still has a large exposure to the PC and gaming markets, where performance has been encouraging.

In PC land, AMD has been grabbing market share from key rival Intel, and the market has been performing well after a torrid time. But we are a little cautious about the impact of a tariff-related pull-forward in demand that could unwind over the coming quarters – an area to watch.

AMD is on the right track to capitalise on the growing demand for AI compute, but it’s got a lot of work to do if it wants to take a slice of pie. We think there’s upside on offer but that comes with more execution risk than rivals who already have leading edge products on offer.

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