Danil Sereda. This is a reprinted and compiled article intended to present diverse market perspectives and research viewpoints, and does not imply endorsement of the views or conclusions herein by this platform. The market appears to be unfairly suppressing Advanced Micro Devices (AMD). Analysts can comprehend the initial market reaction to AMD's Q4 earnings, at least anticipating the direction of the sentiment, but they believe this reaction is not entirely justified. A deeper analysis beyond the surface-level performance data and the components of profit expansion reveals a significant transformation in AMD's revenue structure, indicating a sustained future increase in the proportion of high-margin businesses. In the view of analysts, AMD's performance outlook for the second half of 2026 has improved markedly. Based on this, analysts maintain a bullish stance on the stock.
Why do analysts hold this view? First, let's examine the performance of AMD's various business segments: · Data Center business: Revenue surged to $5.4 billion, a 39% year-over-year increase, accounting for almost half of total revenue. This was driven by an acceleration in shipments of the MI350 series chips and record sales of the EPYC Turin series CPUs. · Client business: Revenue increased to $3.1 billion, up 34% year-over-year, solidly confirming prior predictions by analysts and other bulls—the PC market recovery is materializing. With a high-value product portfolio including the Ryzen 9000 series and AI PCs, AMD holds an advantage over peers in better converting market share gains in this segment into profits. · Gaming business: While a smaller revenue segment ($850 million, 8.18% of total revenue), it saw a substantial 50% year-over-year jump; a 35% sequential decline was attributed to the console market entering its seventh mature year, but combined with the strong annual growth, the performance is entirely reasonable. · Embedded business: Revenue saw a slight 3% year-over-year increase, constituting only 9.2% of total revenue, having a minimal impact on overall performance.
Analysts understand that the market had previously priced in AMD's promising prospects, and investor sentiment shifted upon seeing net profit figures that included adjustments for sales to China and inventory. However, looking at gross margins, even excluding the China sales revenue and the reversal of inventory write-downs, the optimized business structure would have driven AMD's gross margin up by approximately 100 basis points year-over-year. In other words, based on the actual Q4 performance, there were no substantive negative developments for the company, and the market's reaction appears clearly overblown.
Analysts believe that once the market volatility triggered by the Q4 earnings subsides, AMD will gradually recover during the natural course of 2026 for the following reasons: AMD is emerging as a core competitor to NVIDIA (NVDA) in the system-on-chip (SoC) arena, with its 2-nanometer process technology potentially launching ahead of NVIDIA's. Reportedly, AMD's upcoming Instinct MI450 series accelerators and "Venice" EPYC server CPUs will utilize TSMC's 2nm (N2) Gate-All-Around (GAA) transistor technology. This process can deliver a 10%-15% performance increase or a 25%-30% power reduction, which is crucial for all power-constrained data centers. NVIDIA's next-generation Rubin architecture is expected to still use an optimized version of TSMC's 3nm process, marking a rare occasion where AMD gains a manufacturing process advantage over NVIDIA.
As the 2nm process matures and yields improve, AMD's gross margins are poised to structurally climb towards the target range of 55%-58%, potentially nearing the upper end. Consequently, the operating leverage demonstrated by AMD in 2024-2025 will continue. Overall, with each product generation, we provide customers with stronger performance, greater memory capacity, and create more value. Generally, offering enhanced product capabilities to customers leads to improved gross margins generation-over-generation. Of course, gross margins are typically lower initially during mass production ramp-up; they gradually improve throughout the product lifecycle as scale increases, yields rise, testing is optimized, and overall performance is enhanced. Therefore, gross margins are dynamic, but over the long term, each generation's margins are expected to exceed the previous one.
Furthermore, AMD's "Venice" EPYC server CPU will also adopt the 2nm process. Management indicated that customer demand for the Venice CPU is "extremely strong," with large-scale cloud business collaboration discussions already initiated in preparation for the product's launch in 2026: The next-generation Venice CPU will extend our leadership across all metrics, and customer demand for it is very high. We are advancing relevant collaborations to ensure that upon launch later this year, it can support large-scale cloud deployments and broad OEM platform adaptation. This transition of the Venice CPU to the 2nm process will become another high-margin growth engine for AMD, aiding the company in achieving its goal of over 50% revenue market share in the server CPU market. Over the past seven years, AMD's share in this sector has risen to approximately 28%. Analysts project it will reach the ultimate target by 2030-2032 (Bank of America analysts forecast it will first surpass 40% in 2027).
Another major catalyst expected to drive AMD's rapid growth in the coming years is the multi-generational collaboration with OpenAI: The partnership involves deploying 6 gigawatts of computing power, representing a long-term growth opportunity for AMD. More importantly, the first revenue from this collaboration is scheduled for Q4 2026, with the partnership cycle extending to 2030. CEO Lisa Su stated during the earnings call that the project is progressing as expected. Development of the MI450 series is proceeding very smoothly; we are extremely satisfied with the current progress and will launch and begin mass production in the second half of the year as scheduled. Regarding capacity ramp-up and customer collaboration, everything is advancing very smoothly. Our partnership with OpenAI is solid, with plans to commence mass production supply for them starting in the second half of this year, continuing through 2027, all proceeding according to plan.
Valuation: Market expectations imply a compound annual growth rate (CAGR) for AMD's earnings per share and revenue exceeding 37% and 30%, respectively, over the next five years. Based on consensus estimates from 38 Wall Street analysts, AMD currently trades at approximately 6.4 times estimated 2027 price-to-sales and about 23.53 times estimated 2027 price-to-earnings. Analysts believe that, supported by its fundamental shift towards a system-level business model, AMD can sustain a valuation corresponding to a Price/Earnings-to-Growth (PEG) ratio of at least 0.8x. Using an adjusted (lowered by 5%) 2027 EPS estimate of $9.78 as a baseline, representing roughly 48.79% growth from the 2026 base, the calculated target price for AMD over the next 12-16 months is $477.17 per share, implying an upside potential of over 114% from the post-earnings decline.
Potential Risks: The aforementioned analysis is based on a core assumption: AMD will flawlessly execute its development plan, successfully complete its business model transformation, and continue gaining market share in both the GPU and CPU markets. In reality, this assumption may not hold true, as competitors will inevitably strive to defend their existing market shares. If chip demand remains robust, leading players' revenues will all see significant growth; however, should demand experience even a slight downturn, a substantive price war could erupt among AMD, NVIDIA, and Intel (INTC). If a price war materializes earlier than anticipated, declining gross margins would erode profits, and the industry's valuation premium could vanish, potentially invalidating the analyst's view of AMD being undervalued with substantial upside.
Conclusion: Despite the existence of these risks (which investors should seriously consider and conduct their own independent research on), analysts still maintain that the market is unfairly penalizing AMD. The trigger for AMD's decline is evident, but when considered alongside the company's fundamental strengths, the market's reaction seems unjust.
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