Why AMD stock is surging over 7% ahead of earnings

Advanced Micro Devices shares rose more than 7% on Tuesday as investors positioned for the chipmaker's second-quarter earnings report.

The AMD stock advanced ahead of results due after the market close, extending a recovery after a volatile stretch for semiconductor shares.

AMD shares rallied over 190% between March 30 and June 30 before falling around 26% through July 29 as investors reassessed valuations across the chip sector following a strong spring rally.

AI data center business takes center stage

While AMD continues to generate revenue from personal computer and gaming chips, investors are increasingly focused on its AI data center business.

The company has expanded rapidly in the segment, growing from $3.7 billion in data center revenue during all of 2021 to a projected $6.5 billion in the second quarter alone.

Wall Street expects AMD to report second-quarter revenue of $11.3 billion, up 47% from a year earlier, with adjusted earnings per share of $1.62, compared with 48 cents in the prior-year period.

Analysts also expect an adjusted operating margin of 27%.

The year-over-year comparison is affected by an $800 million inventory charge recorded last year after changes to US export controls disrupted planned chip sales to China.

AMD has also strengthened its position in server processors, where the company says it has captured about 40% of the market and is targeting a 50% share.

The company expects the server CPU market to reach approximately $220 billion annually by 2030 as demand for AI infrastructure continues to expand.

Competitors, including Intel, Arm, Nvidia, and Amazon, have also pointed to growing demand for server processors this year.

Helios rollout under scrutiny

Although Nvidia remains the dominant supplier of AI accelerators, AMD has continued narrowing the technology gap.

At its recent Advancing AI conference, the company unveiled its Helios AI servers, which combine AMD graphics processors, central processors, and networking chips into an integrated platform supported by its software ecosystem.

The system reflects an approach similar to Nvidia's tightly integrated AI infrastructure strategy.

AMD has said Helios is scheduled to begin shipping to its first major customers, Meta Platforms and OpenAI, before the end of the current quarter.

As part of those agreements, AMD granted Meta and OpenAI performance-based warrants to purchase up to 160 million shares each, with vesting tied to deployment milestones.

Guidance expected to drive market reaction

Analysts expect AMD's earnings outlook to be more important than its reported quarterly results.

Historically, AMD shares have experienced significant post-earnings volatility, with the stock averaging moves of roughly 16.5%—either higher or lower—during the month following earnings announcements.

Benchmark reiterated its Buy rating and $685 price target on AMD ahead of the report.

Analyst Cody Acree expects second-quarter results to come in broadly in line with consensus forecasts, projecting revenue of $11.28 billion and adjusted earnings per share of $1.63, compared with Wall Street estimates of $11.31 billion and $1.62, respectively.

For the third quarter, Benchmark forecasts revenue of $12.49 billion and adjusted earnings per share of $1.87, broadly matching consensus expectations.

According to Benchmark, the earnings call will be judged primarily on management's guidance for the September quarter, gross margin expectations, and the timing of the Helios rollout, with those factors likely to determine the market's reaction more than the second-quarter results themselves.