AMD Forecasts 66% Q4 Growth on AI Chip Demand: Rapid Earnings Reaction

AMD (AMD +3.65%) reported a record third-quarter revenue of $13.4 billion, up 45% from the previous quarter, as data center sales nearly doubled. Investors responded positively, with shares jumping about 6.5% in after-hours trading. The company now anticipates a more significant growth rate of approximately 66% in the upcoming quarter.

However, AMD is investing heavily to achieve this growth, and its cash reserves have not yet caught up with its profits. Data center demand is driving profits up faster than sales. The high costs of chip design mean that each additional dollar in GPU and server CPU sales primarily contributes to profit. This has led to a substantial increase in GAAP operating margin, up 7 points from a year ago.

However, cash remains a concern. AMD increased its inventory by around $3 billion to prepare for the Helios rack systems and Venice chips, which it plans to ramp up production for the fourth quarter. Additionally, AMD borrowed heavily, more than doubling its debt since June. If these products are delivered on schedule, the cash flow will follow.

Nevertheless, if demand falls short, AMD will be left with substantial, expensive stock. The company also reported a $1.1 billion GAAP profit hit due to warrants it issued to certain customers, a charge that increases with AMD's share price, potentially shrinking reported earnings. The statement does not disclose how many of these warrants are outstanding.

Investors should monitor whether fourth-quarter revenue reaches the guided $17 billion and whether the inventory begins to convert into cash. Additionally, they should watch to see if the adjusted gross margin stays close to the guided 55% as rack-scale systems ramp up.