Wall Street comments on AMD earnings: Operating expenses limit profitability, market focus shifts to AI rack-scale in the second half

AMD’s latest Q4 2025 earnings report, while exceeding market expectations in revenue, did not fully dispel Wall Street’s concerns due to the impressive figures behind the numbers. The core issue is that the company’s operating expenses exceeded expectations, continuously limiting profit margin expansion, and the market is now focusing on whether it can achieve a key breakthrough in the second half of the year with rack-scale AI products.

According to analyses from multiple Wall Street investment banks such as Morgan Stanley and Goldman Sachs, AMD achieved $10.3 billion in revenue in the fourth quarter, up 34% year-over-year and 11% quarter-over-quarter, significantly surpassing the market consensus of $9.67 billion. However, the market believes that this performance includes approximately $390 million in one-time special sales income. Excluding this factor, the actual revenue growth is only slightly above the upper end of guidance.

The primary driver of performance growth remains the data center business, which generated $5.38 billion in revenue in Q4, up 24% quarter-over-quarter. Notably, excluding the aforementioned one-time income, the quarter-over-quarter growth would be about 15%. Among these, server CPU revenue, driven by AI demand, increased approximately 10% quarter-over-quarter, reaching a new high; data center GPU revenue surged about 40% quarter-over-quarter to $2.75 billion, mainly due to the continued capacity ramp-up of the new MI355X product.

Despite strong business performance, higher-than-expected operating expenses have become a common concern in multiple institutional reports, with the market worried that this will continue to constrain operational leverage improvements. Currently, investors are awaiting management’s commitment that the rack-scale AI products to be launched in the second half of the year will be a key catalyst for substantial profit growth.

Q1 Guidance Outperforms Expectations, but Operating Expenses Draw Attention

AMD’s guidance for Q1 2026 indicates that its revenue outlook exceeds market consensus. The company expects quarterly revenue of about $9.8 billion, higher than the $9.4 billion expected by the market, despite a roughly 5% decline from the previous quarter. By business segment, data center revenue is expected to grow sequentially, with server CPU revenue potentially achieving double-digit growth during the traditional off-season; data center GPU revenue, after excluding specific factors, is expected to remain flat or slightly increase quarter-over-quarter.

However, what has attracted market attention is its cost control issue. The company’s guidance for operating expenses is $3.05 billion, significantly higher than the market expectation of $2.94 billion. This marks several consecutive quarters where operating expenses have exceeded expectations. Goldman Sachs analyst James Schneider noted in his report that AMD’s operating expenses last quarter already reached $3 billion, well above the midpoint of the previous guidance of $2.82 billion, and emphasized that the company will continue to increase investments to support strategic investments in AI systems and software, with expected significant quarter-over-quarter growth in operating expenses in the second half of 2026.

Meanwhile, although the gross margin guidance is slightly above expectations at 55%, this figure includes about $100 million in sales from previously reserved inventory, which somewhat diminishes the “value” of this metric.

MI455 Series Progressing as Planned, Long-term Growth Targets Unchanged

Despite short-term operational efficiency challenges, AMD has once again clarified its timeline and market expectations for the next-generation rack-scale AI products based on the MI455 series GPU. The company confirmed that these products will be delivered to customers as scheduled in Q3 2026 and will see larger revenue ramp-up in Q4, countering recent market rumors of potential delays.

Management further disclosed key customer deployment progress, including OpenAI’s expected deployment of MI-4XX architecture-based AI compute clusters with a total capacity of 1 GW starting in the second half of this year, and Oracle’s related deployments scheduled to commence in 2026 and beyond. Based on this, the company remains highly confident in achieving data center GPU revenue of “hundreds of billions of dollars” by 2027, and expects the data center business to grow over 60% annually over the next three to five years, driving the company’s overall revenue compound annual growth rate to approximately 35%.

Morgan Stanley analyst Joseph Moore pointed out that, despite short-term one-time factors causing some disturbance, server CPU growth during the traditional off-season remains positive, providing an optimistic signal for the full-year performance. He also emphasized that AMD has achieved a majority market share in several major cloud computing markets, which is highly advantageous for its future competitive landscape.

Mixed Results in Other Business Segments, PC Cost Pressures Emerge

Client business revenue in Q4 was $3.1 billion, up 13% quarter-over-quarter, mainly benefiting from improved high-end product mix and increased market share. However, management holds a cautious outlook for 2026, expecting the PC market to face rising costs for key components, which could lead to demand below traditional seasonal levels in the second half. JPMorgan’s global research team forecasts that global PC shipments in 2026 may decline about 9% year-over-year.

The gaming business reported $843 million in revenue in Q4, a sharp 35% decline quarter-over-quarter, mainly because Sony and Microsoft, to meet holiday demand, completed concentrated stockpiling of semi-custom chips for consoles in Q3, leading to a natural drop in related revenue this quarter. With the new generation flagship gaming consoles expected to launch in 2027, this segment is unlikely to grow in 2026.

Embedded business showed signs of a positive recovery in Q4, with revenue reaching $950 million, up 11% quarter-over-quarter, and achieving its first year-over-year growth since June 2023. Management expects this segment to grow throughout 2026, mainly because channel inventories have been largely digested, and demand in industrial, automotive, and communications end markets is gradually warming.

Investment Banks Maintain Cautious Stance, Valuations Considered Fully Priced

In light of AMD’s latest performance and outlook, several major investment banks maintain a neutral rating. All agree that while AMD has growth potential, its current valuation already reflects this, and short-term operational efficiency remains a key constraint. Deutsche Bank analyst Ross Seymore believes that the company’s steady execution and long-term growth prospects are fully priced into the current stock price.

JPMorgan analyst Harlan Sur emphasized that until AMD demonstrates clear operational leverage improvements in the second half of 2026, expense issues will continue to weigh on the stock. Goldman Sachs has lowered its EPS estimates for 2026-2028 by an average of 4%, mainly due to higher operating expenses offsetting revenue growth expectations; Morgan Stanley has also significantly raised its full-year operating expense forecasts.

The consensus among investment banks is that AMD’s position in server CPU and client markets remains solid, and the long-term potential of data center GPU business is promising. However, execution risks for its upcoming rack-scale AI products, potential customer concentration issues, and limited operational leverage in the short term remain market concerns. Until new products like MI450/Helios prove market acceptance and drive profitability, the stock may struggle to make significant breakthroughs.

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