AMD (AMD)

Computer processor maker AMD (NASDAQ:AMD) announced better-than-expected revenue in Q1 CY2025, with sales up 35.9% year on year to $7.44 billion. Guidance for next quarter’s revenue was better than expected at $7.4 billion at the midpoint, 1.3% above analysts’ estimates. Its non-GAAP profit of $0.96 per share was 2.8% 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 performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Thankfully, AMD’s 30.8% 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 9.7% 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 35.9%, and its $7.44 billion of revenue exceeded Wall Street’s estimates by 4.4%. Beyond the beat, this marks 7 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 26.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 16.3% over the next 12 months, an improvement versus the last two years. This projection is particularly noteworthy for a company of its scale and implies its newer products and services will catalyze better top-line performance.

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 169, which is 52 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 52.2% gross margin over the last two years. That means for every $100 in revenue, roughly $52.22 was left to spend on selling, marketing, R&D, and general administrative overhead.

AMD produced a 53.6% gross profit margin in Q1, marking a 2.6 percentage point increase from 51% in the same quarter last year. AMD’s full-year margin has also been trending up over the past 12 months, increasing by 3 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

AMD was profitable over the last two years but held back by its large cost base. Its average operating margin of 6.4% 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 6.6 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.

In Q1, AMD generated an operating profit margin of 10.8%, up 10.2 percentage points year on year. The increase was solid, 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.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

AMD’s EPS grew at a spectacular 37.2% compounded annual growth rate over the last five years, higher than its 30.8% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

In Q1, AMD reported EPS at $0.96, up from $0.62 in the same quarter last year. This print beat analysts’ estimates by 2.8%. Over the next 12 months, Wall Street expects AMD’s full-year EPS of $3.65 to grow 25.5%.

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 7.8%, subpar for a semiconductor business.

Taking a step back, we can see that AMD’s margin dropped by 5.2 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 $727 million in Q1, equivalent to a 9.8% margin. This result was good as its margin was 2.8 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? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

AMD’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 17.7%, slightly better than typical semiconductor business.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

AMD is a profitable, well-capitalized company with $7.31 billion of cash and $4.73 billion of debt on its balance sheet. This $2.58 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 expectations this quarter. We were also glad its adjusted operating income outperformed Wall Street’s estimates. On the other hand, its inventory levels materially increased. Overall, this print had some key positives. The stock traded up 4.3% to $102.82 immediately after reporting.

Updated: May 16, 2025 at 10:19 PM EDT

Before making an investment decision, investors should account for AMD’s business fundamentals and valuation in addition to what happened in the latest quarter.

In our opinion, AMD is a solid company. To kick things off, its revenue growth was exceptional over the last five years. And while its operating margins reveal poor profitability compared to other semiconductor companies, its spectacular EPS growth over the last five years shows its profits are trickling down to shareholders. On top of that, its gross margins indicate it has pricing power.

AMD’s P/E ratio based on the next 12 months is 25.5x. Looking at the semiconductor landscape right now, AMD trades at a pretty interesting price. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $126.76 on the company (compared to the current share price of $114.40), implying they see 10.8% upside in buying AMD in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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