Bernstein AMD Q4 2025: $235 Target Masks Opex Crisis

Detailed Results Analysis

AMD's fourth quarter 2025 results showed revenue of 10.27 billion dollars, representing an 11 percent sequential increase and 34 percent year-over-year growth. The revenue beat versus Street expectations of 9.65 billion dollars was helped substantially by 390 million dollars of MI308 Instinct revenue to China that had been previously written down and was not included in guidance.

Non-GAAP gross margins reached 57.0 percent, well above both Street expectations and guidance of 54.5 percent, up approximately 300 basis points sequentially. However, this margin performance was aided by the MI308 inventory release. Excluding that impact, gross margins were approximately 55 percent in the quarter, about 50 basis points above expectations.

Segment Performance Deep Dive

The Datacenter segment delivered revenue of 5.38 billion dollars, above consensus expectations of 4.97 billion dollars, though largely inline when excluding the 390 million dollar China MI308 contribution. Revenue grew 24 percent sequentially and 39 percent year-over-year. Within datacenter, AI GPU sales were estimated at approximately 2.5 to 2.6 billion dollars, roughly inline with consensus at 2.16 billion dollars excluding the unexpected China sales.

Client segment revenues of 3.10 billion dollars exceeded expectations of 2.89 billion dollars, up 13 percent sequentially and 34 percent year-over-year. The strong performance was driven by record desktop and mobile demand as well as robust Commercial Ryzen adoption, with sell-through increasing more than 40 percent year-over-year. AMD's client revenues substantially outpaced overall PC market sequential performance.

Gaming revenues of 843 million dollars came in slightly below consensus at 855 million dollars, down 35 percent sequentially in seasonal decline but up 50 percent year-over-year driven by higher semi-custom revenue. Embedded revenues at 950 million dollars were marginally below consensus of 961 million dollars, up 11 percent sequentially and 3 percent year-over-year, marking the first year-over-year growth in nearly three years.

First Quarter 2026 Outlook

AMD guided first quarter 2026 revenue to 9.8 billion dollars plus or minus 300 million dollars, above consensus expectations of 9.39 billion dollars. However, the guidance includes an estimated 100 million dollars benefit from incremental MI308 China revenue. Non-GAAP gross margins are guided to approximately 55 percent, above consensus of 54.3 percent.

The majority of the revenue beat appears driven by Datacenter revenues, which are expected up low single digits sequentially to approximately 5.5 billion dollars versus Street at approximately 5.1 billion dollars. This outperformance is well above consensus even excluding China sales, driven by strong server CPU growth expected at low double digits percent sequentially, well above the typical seasonal decline.

AI GPU Trajectory and China Impact

Bernstein believes AI GPU outlook is down sequentially, perhaps to approximately 2.4 to 2.5 billion dollars, but this includes a substantial 300 million dollar China headwind as MI308 sales decline from approximately 400 million dollars in fourth quarter to 100 million dollars in first quarter. Excluding this China impact, AI GPU sales are seen in the 2.3 to 2.4 billion dollar range, modestly above Street expectations of approximately 2.2 billion dollars.

Client revenues are guided down low double digits sequentially to approximately 2.8 billion dollars, above Street expectations of approximately 2.6 billion dollars. Gaming outlook appears below expectations, down approximately 20 percent sequentially to around 670 million dollars versus Street at 813 million dollars. Embedded is guided down high single digits sequentially to approximately 860 million dollars, below consensus of 918 million dollars.

Non-GAAP operating expenses are guided to approximately 3.05 billion dollars in first quarter, again well above consensus of 2.85 billion dollars and up approximately 50 million dollars sequentially. The non-GAAP effective tax rate is expected at approximately 13 percent. Implied earnings per share lands at around 1.25 dollars versus Street at 1.23 dollars, with higher operating expenses largely offsetting the stronger revenue outlook.

Investment Perspective and Analysis

Bernstein believes investors had been positioning for a strong print, which AMD delivered. However, it appears somewhat disappointing that in such an intense competitive environment, overall results were not substantially beyond inline performance without the China boost. The shares traded down approximately 8 percent in aftermarket trading following the results announcement.

On the positive side, server trends appear very solid. Unlike their primary competitor, AMD recognized the datacenter opportunity early enough to secure sufficient supply to capitalize on the market growth. The company continues to take substantial share in the client segment, and gross margins appear to be holding up better than previously anticipated.

Persistent Challenges

Similar to recent quarters, near-term AI numbers are not demonstrating significant inflection outside of China sales that face limited demand at prevailing pricing. The pace and trajectory of the OpenAI partnership ramp remains subject to debate. At a minimum, it appears increasingly likely the OpenAI volume contribution will be a fourth quarter 2026 story rather than providing meaningful near-term benefit.

Client headwinds may materialize in the second half of 2026 as memory pricing dynamics impact the broader PC industry, alongside console headwinds that are already manifesting in current results. The Gaming segment's 35 percent sequential decline in fourth quarter and projected 20 percent decline in first quarter highlight these pressures.

The operating expense ramp that once again is limiting earnings leverage on higher revenue is starting to become tiresome. We understand the rationale behind higher spending but believe the company would be better off guiding more realistically rather than coming in hot every quarter.

Operating Expense Execution Concerns

The persistent pattern of guiding operating expenses high, substantially exceeding guidance, then guiding even higher in subsequent quarters creates an impression that management lacks adequate control over their spending processes. While Bernstein does not question the strategic rationale for increased investments in research and development and sales capabilities, the repeated misses on operating expense guidance are problematic from an execution standpoint.

For fourth quarter 2025, non-GAAP operating expenses of 3.00 billion dollars came in well above consensus expectations of 2.79 billion dollars. For first quarter 2026, the 3.05 billion dollar guidance once again sits approximately 200 million dollars above Street expectations. This pattern limits the company's ability to translate revenue upside into meaningful earnings beats and raises questions about spending discipline.

Valuation and Positioning

At current levels, AMD trades at approximately 36 times forward earnings, making it the most expensive among the major AI semiconductor peers. This compares to NVIDIA at approximately 23 times, Broadcom at approximately 28 times, and Marvell at approximately 21 times forward earnings. The premium valuation implies high expectations for AMD's AI GPU ramp and market share gains.

Bernstein raises its fiscal 2026 revenue estimate from 40.6 billion dollars to 44.2 billion dollars, and fiscal 2027 revenue from 56.6 billion dollars to 59.7 billion dollars. The firm introduces fiscal 2028 revenue estimates at 75.4 billion dollars. AI GPU revenue forecasts stand at 13.4 billion dollars for 2026, 27 billion dollars for 2027, and 40 billion dollars for 2028.

Bernstein increases non-GAAP earnings per share estimates from 5.36 dollars to 6.12 dollars for fiscal 2026, and from 8.79 dollars to 9.25 dollars for fiscal 2027. The firm introduces fiscal 2028 earnings per share estimates at 12.96 dollars. These increases reflect higher revenue forecasts partially offset by elevated operating expense assumptions.

Price Target and Rating

Bernstein raises its price target from 225 dollars to 235 dollars, applying an unchanged 25 times multiple to fiscal 2027 pro-forma earnings per share estimate of 9.25 dollars. The firm maintains its Market-Perform rating on AMD shares. At the current price of 242 dollars, the stock trades approximately 3 percent above the 235 dollar price target.

The investment thesis acknowledges AI expectations remain elevated, and the new partnership with OpenAI has the prospect to drive further potentially substantial growth. However, Bernstein characterizes the investment as a waiting game at 35 times forward earnings, expressing a preference to find opportunities elsewhere in the semiconductor landscape.

Key Investment Considerations

Investors evaluating AMD should consider several critical factors. The company has demonstrated strong execution in securing datacenter market share, particularly in server CPUs where it recognized the opportunity earlier than competitors. Client segment share gains continue at an impressive pace, with sell-through growth exceeding 40 percent year-over-year.

However, near-term AI GPU growth faces headwinds from China demand weakness and uncertain timing on the OpenAI ramp. The persistent operating expense overruns suggest execution challenges that limit the company's ability to demonstrate operating leverage despite strong revenue growth. Gaming and Embedded segments face cyclical pressures that may persist through 2026.

1. Datacenter Opportunity: Strong server CPU traction and growing AI GPU market share position AMD well for long-term growth in the datacenter segment. Early recognition of market trends enabled supply chain positioning ahead of competitors.
2. Client Share Gains: Continued market share expansion in both commercial and consumer PC segments demonstrates competitive product positioning. However, potential second half 2026 industry headwinds from memory pricing could impact growth trajectory.
3. Operating Expense Discipline: Repeated operating expense guidance misses raise questions about management's ability to execute on spending plans. While investment in growth is strategically sound, execution versus guidance needs improvement.
4. Valuation Premium: At 36 times forward earnings, AMD trades at a significant premium to semiconductor peers. This valuation requires flawless execution on AI GPU ramp and continued share gains to justify current levels.
5. OpenAI Partnership Timing: The pace and magnitude of revenue contribution from the OpenAI partnership remains uncertain. Bernstein believes meaningful volume is increasingly likely a fourth quarter 2026 event rather than near-term catalyst.

Additional considerations include inventory levels that reached 7.92 billion dollars at quarter end, up from 7.31 billion dollars sequentially, with days of inventory increasing to 161 from 155. The company repurchased 160 million dollars worth of shares in the quarter and ended with 10.6 billion dollars in cash and marketable securities versus 7.2 billion dollars in the prior quarter.