AMD (AMD)

Computer processor maker AMD (NASDAQ:AMD) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 35.6% year on year to $9.25 billion. On top of that, next quarter’s revenue guidance ($9.6 billion at the midpoint) was surprisingly good and 4.7% above what analysts were expecting. Its non-GAAP profit of $1.20 per share was 2.4% above analysts’ consensus estimates.

Company Overview

Founded in 1969 by a group of former Fairchild semiconductor executives led by Jerry Sanders, Advanced Micro Devices (NASDAQ:AMD) is one of the leading designers of computer processors and graphics chips used in PCs and data centers.

AMD’s primary competitors are Intel (NASDAQ:INTC), Nvidia (NASDAQ:NVDA), and Qualcomm (NASDAQ:QCOM).

Chips need to keep getting smaller in order to advance on Moore’s law, and that is proving increasingly more complicated and expensive to achieve with time. That has caused most digital chip makers to become “fabless” designers, rather than manufacturers, instead relying on contracted foundries like TSMC to manufacture their designs. This has benefitted the digital chip makers’ free cash flow margins, as exiting the manufacturing business has removed large cash expenses from their business models. Read More. The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. Digital chips derive their processing power from the number of transistors that can be packed on an individual chip. In chip design, nanometers or “nm” refers to the length of a transistor gate – the smaller the gate the more processing power that can be packed into a given space. In 1965, Intel’s founder Gordon Moore famously predicted a doubling of transistors on a chip every two years. The concept, known as Moore’s Law, was based on his belief that the technology used to create semiconductors would improve continuously, allowing chips to become ever smaller and ever more powerful.

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, AMD’s 29.9% annualized revenue growth over the last five years was incredible. Its growth beat the average semiconductor company and shows its offerings resonate with customers, a helpful starting point for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. AMD’s annualized revenue growth of 20.4% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, AMD reported wonderful year-on-year revenue growth of 35.6%, and its $9.25 billion of revenue exceeded Wall Street’s estimates by 5.6%. Beyond the beat, this marks 9 straight quarters of growth, showing that the current upcycle has had a good run - a typical upcycle usually lasts 8-10 quarters. Company management is currently guiding for a 25.4% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 21.3% over the next 12 months, similar to its two-year rate. This projection is eye-popping for a company of its scale and implies the market sees success for its products and services.

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, AMD’s DIO came in at 158, which is 35 days above its five-year average, suggesting that the company’s inventory has grown to higher levels than we’ve seen in the past.

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

AMD’s unit economics are reasonably high for a semiconductor business, pointing to a lack of meaningful pricing pressure and its products’ solid competitive positioning. As you can see below, it averaged an impressive 51.7% gross margin over the last two years. That means for every $100 in revenue, roughly $51.74 was left to spend on selling, marketing, R&D, and general administrative overhead.

AMD produced a 54.5% gross profit margin in Q3, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

AMD was profitable over the last two years but held back by its large cost base. Its average operating margin of 7.4% was weak for a semiconductor business. This result is surprising given its high gross margin as a starting point.

Analyzing the trend in its profitability, AMD’s operating margin decreased by 11.5 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. AMD’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, AMD generated an operating margin profit margin of 13.7%, up 3.1 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

AMD’s EPS grew at a remarkable 27.9% compounded annual growth rate over the last five years. However, this performance was lower than its 29.9% annualized revenue growth, telling us the company became less profitable on a per-share basis as it expanded.

Diving into AMD’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, AMD’s operating margin expanded this quarter but declined by 11.5 percentage points over the last five years. Its share count also grew by 35.1%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q3, AMD reported adjusted EPS of $1.20, up from $0.92 in the same quarter last year. This print beat analysts’ estimates by 2.4%. Over the next 12 months, Wall Street expects AMD’s full-year EPS of $3.73 to grow 50.1%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

AMD has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 10.8%, subpar for a semiconductor business.

Taking a step back, we can see that AMD’s margin dropped by 5.8 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it’s in the middle of a big investment cycle.

AMD’s free cash flow clocked in at $1.53 billion in Q3, equivalent to a 16.5% margin. This result was good as its margin was 9.3 percentage points higher than in the same quarter last year. Its cash profitability was also above its two-year level, and we hope the company can build on this trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although AMD has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 14.6%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+.

Big corporations like AMD are attractive to many investors in times of instability thanks to their fortress balance sheets that buffer pockets of soft demand.

AMD is a profitable, well-capitalized company with $7.24 billion of cash and $3.87 billion of debt on its balance sheet. This $3.37 billion net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing AMD beat analysts’ revenue, EPS, and EBITDA expectations this quarter. We were also glad its revenue guidance for next quarter exceeded Wall Street’s estimates. On the other hand, its inventory levels materially increased. Overall, we think this was a decent quarter with some key metrics above expectations. Investors were likely hoping for more, and shares traded down 1.2% to $247.23 immediately after reporting.

Updated: December 3, 2025 at 9:26 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in AMD.

There are several reasons why we think AMD is a great business. For starters, its revenue growth was exceptional over the last five years. On top of that, its spectacular EPS growth over the last five years shows its profits are trickling down to shareholders, and its projected EPS for the next year implies the company’s fundamentals will improve.

AMD’s P/E ratio based on the next 12 months is 38.8x. Looking at the semiconductor landscape today, AMD’s fundamentals really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $283.57 on the company (compared to the current share price of $216.89), implying they see 30.7% upside in buying AMD in the short term.