$AMD · The Motley Fool · 2026-11-03

AMD has released its latest quarterly results. A great milestone for the company. Apart from this, good predictions have also been obtained. And for the first time, we have some nice and actionable numbers for the fourth quarter and 2027.

The market really liked it. The share price rose after market trading ended. The share price also rose during the day. Most semiconductor and AI sector stocks rose during the day on Tuesday, which I think we should accept.

The current market is largely based on news, and that news is currently not in favor of the AI sector. So, I think we'll take every good day.

But for now, let's focus on AMD's earnings report. Our revenue has increased by 45%, exceeding the upper limit of expectations. Non-GAAP EPS grew 74%.

As you can see in the fourth quarter revenue guidance, there is a new momentum in growth. It reached $17 billion, up 66% year-on-year and 27% quarter-on-quarter. They expect revenue growth of over 80% in 2027, with the data center sector contributing over 80% of sales.

And why is this number over 80% so important? Because if we look at what analysts were expecting for the next fiscal year, it was revenue close to $90 billion, but only 76.3% growth.

Now, AMD is telling us that they expect revenue growth of over 80% for next year. So, if we look at the dollar amount, we know that it will be over $90 billion. We also know that the FY28 picture will also be higher than the market's current expectations.

Therefore, some revised estimates are expected from analysts in the next few days.

Returning to this quarter, we see that gross margin increased by 190 basis points year-over-year. It has remained largely stable over the quarter. Operating expenses increased by 29% year-on-year.

While revenue grew by 45%, operating income grew by 75% year-on-year and operating margin reached 29.3%, up 5.1 percentage points from the previous year. Net income increased by 77% and diluted EPS increased by 74%.

Looking at each business segment, we have data center, client and gaming (which are now combined), and embedded businesses. So, data centers, of course, you can clearly see that's the biggest category for them.

It is growing the fastest. Our operating margin has also increased from 25% to 34%, with operating income in that segment at $2.9 billion. This is 168% more than last year.

Client and gaming operating margins have declined. Revenue has also decreased. Even though the client base has increased slightly, gaming is under pressure. The embedded category has grown compared to last year.

And as you know, the embedded business is very profitable. We are now back to a 41% operating margin.

Looking at the fourth quarter of data centers, we expect to reach $12.8 billion. So, it's up 50% quarter-on-quarter. They said the following. Sales of both servers, cloud and enterprise have more than doubled compared to last year.

MI250X shipped in large quantities. Helios racks are deployed at Entropic, Meta, Microsoft, OpenAI, and Oracle. Revenue shipments from Venice have started on about 240 OEM ODM platforms and are about 20% higher than Turing for the fourth quarter.

Data center AI will outpace server revenue by a large margin and the division's revenue will more than double for the full year 2026. All of these are of course under the data center category.

Looking at client, gaming and embedded, it's a smaller part of the business, probably not as important anymore. But the client division's revenue is still $2.95 billion. It grew by just 7% compared to last year, but fell by 4% quarter-on-quarter.

For 2027, they said the number of PC units will decline in double digits. In gaming, it is already down 40% year-over-year and remains unchanged quarter-over-quarter. In the case of embedded, we just discussed it.

Finally, we are seeing further momentum in growth. They see over $18 billion in design wins expected in 2026, and they expect growth to accelerate in 2027. And it's a small business, but a very profitable one.

Looking at the margins, growth will be stable to downtrend. Operating margins will increase, so we expect 32.9% in the fourth quarter from 29.3% operating margin. Where the gross margin has now dropped from around 56 to 55.

They say that 55% is the benchmark. They did not promise any minimum limit for 2027. They said operating expenses in 2027 will grow at less than half the rate of revenue growth and that this expansion will come from operating leverage, not gross margin, although they expect the dollar amount of gross margin to continue to grow significantly.

Now, the weak point is free cash flow, or cash flow, at only $554 million. We saw inventory increase by $3 billion quarterly. The number of days of storage has also increased. The days sales are outstanding have increased slightly.

And the amount of money paid has increased from $2.9 billion in December to $7.8 billion now. The CFO said that inventory has been built up for data center demand and AMD will continue to invest in inventory and capacity through 2027, but they expect cash conversion to lag behind revenue.

Which is reasonable. If they want to meet all those needs, that's what will happen. But ultimately, I think the free cash flow profile and dollar amount will increase significantly.

Looking at the fourth quarter guidance, revenue could be around $17 billion, with a plus-minus 3% margin. We usually get plus or minus $300 million. Now it's 3%, which means $16.5 billion or $17.5 billion.

I wouldn't be surprised to see $17.5 billion, which would mean 66% year-over-year growth and 55% margin. Data centers are expected to grow by 50% on a quarterly basis. Client and gaming will decline by more than 20% on a quarterly basis, and embedded will grow in double digits on a quarterly basis.

Implied non-gap EPS could increase by 40% and implied operating margin should be around 33% or $5.6 billion.

This takes us back to 2027. Revenue of about $94 billion should be expected. Their server CPU revenue is expected to double, exceeding their previous target of over 70%. Data center AI revenue will more than double, which is faster than previous guidance.

And again, over 80% of sales come from data centers.

Finally, a few important takeaways from the call. Demand is greater than supply. Wafer packaging and memory are protected until 2027. When asked about specific investments by their customers and clients, they said the following.

AMD knows where GPUs are going. They are investing selectively with major partners. Memory costs, HBM and component price inflation are being shared with their customers. Regarding the mix of server growth, they said there was a slight increase looking primarily at the number of units and cores and ASP.

For the PC recession, they are selling in line with sales. Supply is shifting towards data centers.

In short, to me this was a nice milestone for AMD. There's a reason why stocks have doubled since the beginning of the year. There's a reason the stock hasn't gone above $650 per share yet.

I think if the share price had been above $600 today before the report, we wouldn't have gotten such a reaction from the market. This is because the share price had fallen and now the company is growing in line with that valuation.

But of course, if the share price goes up a lot, at some point there is a major mismatch with the valuation, then the price drops and the market says, "Okay, that's the right price for it."

The business adjusted to the valuation and the share price continued to rise. But this only holds true when the company performs very well, which we have seen this quarter and in the case of AMD, this is expected to continue in the next few quarters.

I am a satisfied AMD shareholder. I liked what I saw. I also liked what I heard.