AMD's Fourth-Quarter Outlook

By Arsheeya Bajwa and Max A. Cherney

(Reuters) – Advanced Micro Devices (AMD) announced its fourth-quarter revenue forecast, falling just short of estimates while raising its artificial intelligence chip sales forecast to $5 billion for 2025 – which did not satisfy investors.

AMD's stock plummeted nearly 7% in extended trading, erasing most of the 8% gain seen over the last three trading days and a significant portion of the more than 10% increase this year.

Demand vs. Supply

The demand for AI chips among major technology companies such as Microsoft and Meta has outpaced supply from AMD and rival Nvidia, affecting the capacity to fulfill orders. AMD CEO Lisa Su mentioned that AI chip supplies would remain tight heading into next year.

Market Sentiment

"AMD's stock was priced for a beat and raise," stated Summit Insights analyst Kinngai Chan. "Clearly, AMD's fourth-quarter outlook was not good enough for investors."

Revenues in AMD's data center business, which includes AI chips, surged 122% to reach $3.5 billion. However, AMD continues to trail Nvidia, which holds around 80% of the AI semiconductor market.

Su increased the AI chip forecast by half a billion from the previous estimate of $4.5 billion made in July. During an earnings call, she also noted partnerships with Microsoft and Meta, who are expanding their use of AMD's AI chips. Microsoft and Oracle offer MI300X chips as part of their cloud services.

Competitive Landscape

Most analysts anticipate Nvidia will retain its dominant market share due to its comprehensive AI ecosystem, including CUDA software and networking equipment.

Production capacity for AI chips will be significantly constrained heading into 2025, according to TSMC, the world's largest contract chip manufacturer, posing challenges for these advanced semiconductors. AMD's potential to sell more AI processors is limited by supply issues at TSMC, according to Running Point Capital's chief investment officer, Michael Schulman.

Financial Expectations

AMD is forecasting fourth-quarter revenue of $7.5 billion, plus or minus $300 million, compared to analysts' average estimate of $7.54 billion. The adjusted gross margin is expected to be around 54%, meeting analyst expectations.

In the third quarter, AMD reported revenue of $6.82 billion, surpassing estimates of $6.71 billion, with adjusted earnings of 92 cents per share aligning with expectations.

The mixed results from AMD impacted the semiconductor sector during extended trading, with Arm Holdings down 1.7%, Nvidia falling 0.3%, and Intel and Lam Research also experiencing declines.

"Investors, after evaluating AMD's solid results against their modest forecast, will likely assess the implications for the broader AI chip and semiconductor industry," Schulman commented.