Why analysts are bullish on AMD despite earnings miss

Advanced Micro Devices AMD shares fell nearly 7% on Wednesday after investors looked past another quarter of strong revenue growth and earnings that exceeded Wall Street expectations, instead focusing on the company's profitability outlook.

The chipmaker reported second-quarter revenue of $11.54 billion, up 50% from a year earlier and above analysts' estimate of roughly $11.28 billion.

Adjusted earnings came in at $1.66 per share, topping the consensus estimate of $1.62.

AMD also issued stronger-than-expected guidance for the current quarter, forecasting revenue of about $13 billion, plus or minus $300 million, compared with analysts' expectations of approximately $12.52 billion.

Despite the solid financial performance, the stock declined sharply as investors questioned whether profit margins would improve alongside rising AI-related sales.

Data center business drives growth

AMD's data center segment remained the company's biggest growth engine during the quarter.

Revenue from the division surged 107% year over year to $6.72 billion, accounting for 58% of total company sales.

Elsewhere, Client revenue increased 23% to $3.1 billion, while Embedded revenue rose 19% to $977 million. Gaming remained the weakest business segment, with revenue falling 31% to $779 million.

While demand across AI products remained strong, investors were more concerned about the company's margin outlook.

AMD expects adjusted gross margin to remain at 56% during the third quarter, even as revenue is projected to increase roughly 13% sequentially.

The market reaction suggested investors are now placing greater emphasis on how profitably AMD can expand its artificial intelligence business rather than solely on revenue growth.

Analysts remain optimistic despite selloff

Although the earnings report failed to satisfy investors, several Wall Street firms maintained bullish views on AMD's long-term prospects.

Wells Fargo said it remains optimistic about the company's ability to gain market share across server and PC processors while expanding its presence in AI accelerators.

Analyst Aaron Rakers said, "We are positive on AMD's ability to continue gaining share in the server and PC CPU markets, increasing traction in datacenter GPUs, positive / accelerating incremental operating leverage, and ultimately, earnings power in excess of +$14/share by 2027."

The brokerage maintained its Overweight rating and raised its price target to $700 from $615.

Bank of America also reiterated its Buy rating with a $620 price target, saying AMD is positioned for accelerating revenue growth over the next two years.

The brokerage acknowledged that the near-term earnings beat and guidance increase were modest but argued that they are less important than the expected ramp-up of the company's Helios rack system beginning later this year.

Goldman Sachs likewise maintained a Buy rating and a $640 price target.

The bank noted that investors had entered the earnings release with high expectations, particularly around server CPU market share gains and AMD's next-generation AI products.

While management highlighted expectations for the Data Center business to grow by well over 100% in 2027, Goldman Sachs suggested "the most bullish expectations were likely ahead of this level on revenue and gross margin."