AMD Q2 Earnings Preview: Can AI Chip Demand Drive the Next Big Breakout?

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Advanced Micro Devices heads into its Q2 report this evening with investors focused on one big question: can the company’s AI‑driven growth in data centers and GPUs offset near‑term headwinds from tariffs, China export restrictions, and rising execution costs? The stock has more than doubled from its April lows near $76 to the $175 level ahead of the release, as hopes build that AMD’s MI300 and upcoming MI350 accelerators will solidify its role as the only credible challenger to Nvidia in the AI arms race. While expectations are high, the quarter is widely seen as a transitional trough in profitability, with margins under pressure even as revenue accelerates.

Consensus calls for Q2 revenue of $7.43 billion, up 27% year‑over‑year, driven largely by data center demand and the first full quarter of MI300 GPU shipments. EPS is expected to land at $0.48, down 30% year‑on‑year from $0.69, reflecting high costs tied to HBM memory, early ROCm software investments, and the impact of halted MI308 shipments to China. Gross margin is projected around 51–52%, down from 54% in Q1. Analysts expect data center revenue to top $3.2 billion, while the client segment is pegged between $1.4 and $1.6 billion. Looking ahead, estimates call for a rebound in EPS to $1.16 in Q3 and $1.34 in Q4, setting Q2 up as the low point of AMD’s 2025 earnings cycle.

The key driver tonight will be data center performance. In Q1, AMD’s data center revenue surged 57% year‑over‑year to $3.7 billion, fueled by EPYC CPU share gains and a ramp in Instinct GPUs. Hyperscaler partnerships with AWS, Microsoft Azure, Oracle, and Meta have been expanding, and Q2 will provide the first detailed look at MI300 adoption at scale. Analysts at Bank of America and Susquehanna see “healthy beat‑and‑raise” potential on core CPU/GPU demand, with MI355X ASP tailwinds and strong cloud CAPEX as catalysts. Further upside could come if China license approvals for MI308 shipments proceed smoothly, potentially unlocking up to $1.5 billion in annual revenue that had been at risk.

Tariffs remain another wildcard. Management has flagged $400–$500 million in incremental tariff costs in Q3 and up to $1.5 billion for the year, mostly tied to manufacturing inputs and packaging complexity. CEO Lisa Su noted recently that U.S.‑based TSMC production comes at a 5–20% cost premium, underscoring the geopolitical squeeze. At the same time, AMD is diversifying exposure, leaning on Europe, the Middle East, and sovereign cloud customers to offset the China drag. If U.S. export licenses for the MI308 are granted on schedule, Q2 could mark the peak of that overhang.

Beyond the top line, investors will zero in on margins and cash flow. Gross margin slipped in Q1 to 54% and is expected to dip further this quarter due to costly HBM and early ROCm ecosystem spend. These investments are strategic—supporting AMD’s open AI ecosystem and ROCm 7 software stack—but they weigh on near‑term earnings. Free cash flow strength will also matter, with Q1 delivering $727 million. Analysts want to see continued discipline even as CapEx ramps to support MI350 and future MI400 production.

For context, Q1 was a blowout. Revenue hit $7.44 billion, up 36% year‑on‑year, with a $318 million beat versus consensus. EPS came in at $0.96, up 55% from a year ago, while operating income reached $1.8 billion. Client CPU sales surged 68% on strength in new Ryzen AI processors, while gaming revenue fell 30% due to weaker semi‑custom demand. Embedded revenue slipped 3%, reflecting mixed aerospace and comms demand. Analysts reacted cautiously, balancing optimism on AI adoption with concern over China export licenses and potential inventory buildups.

Analyst sentiment since Q1 has shifted more constructive as AMD’s AI story has gained momentum. Bank of America recently lifted its price target to $200, citing stronger MI355X pricing and CPU share expansion into 2026. Susquehanna raised its PT to $210, expecting results in line to slightly better than consensus, with strength in servers and the resumption of AI shipments into China. Melius upgraded AMD from Hold to Buy, calling the company “in the middle of another move to the upside” with potential EPS power above $8 within two years. Stifel and Evercore were positive on AMD’s Advancing AI event, highlighting the MI350 launch, MI400 roadmap, and partnerships with Oracle, Meta, OpenAI, and Microsoft. The common thread: AMD is now being valued as a platform player in AI infrastructure, not just a CPU challenger.

Risks, however, remain front and center. Export controls could tighten further, limiting Chinese demand for high‑end GPUs. Early MI300 ramp costs could exceed expectations, pushing gross margins lower than forecast. Client PC demand, though stable in Q1, could weaken again if macro conditions deteriorate. And sentiment risk is elevated: with 27 EPS downgrades over the past 90 days, the bar for upside is high, and a weak guide could trigger a sharp pullback after the stock’s 130% rally from April lows.

On valuation, AMD trades at about 44x FY2025 EPS estimates and 8.9x sales, rich but not extreme given peers. Nvidia, for instance, often trades at 17–20x sales versus AMD’s sub‑9x. By FY2026, AMD’s P/E is expected to fall closer to 30x as EPS accelerates with MI400 and broader AI adoption. Analysts argue that if FY2026 EPS reaches $5.88, a 30x multiple supports ~$176 per share, while a more bullish 35x multiple implies $205–$221. In short, tonight’s results could help re‑rate the stock higher if AMD demonstrates both revenue robustness and early margin stabilization.

Q2 is widely seen as the trough in AMD’s profitability cycle, but it may also mark the start of its next leg higher. The MI300 ramp, MI350 launch, and partnerships with hyperscalers and sovereign clouds underscore its growing role as a credible Nvidia alternative. Execution on margins, clarity on China, and guidance for H2 will determine whether AMD’s rally continues toward $200+ or stalls on tariff and cost concerns.

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