Schwab Network

Advanced Micro Devices (AMD) heads into its third-quarter earnings report after the close on Tuesday in a volatile environment for the chip sector.

Even with the recent pullback from all-time highs last month, expectations are elevated as investors look for continued momentum across AI chips and server CPUs. As of Monday’s closing price, the stock has pulled back 29% from its record high of $658.52 on October 6. Despite the recent weakness with the stock in bear-market territory, AMD shares are still up 118% this year.

The Zacks consensus calls for $13.1 billion in sales and earnings of $1.94 per share, reflecting 42% revenue growth on 62% higher earnings. The key metric may continue to be the Data Center business. Last quarter, Data Center revenue reached $6.7 billion, up 107% year over year, driven by EPYC server processors and Instinct AI accelerators. Server CPU sales increased more than 70% as AMD benefited from cloud and enterprise demand and adoption of its architecture. For Q3, management has been looking for double-digit sequential Data Center growth, with both CPUs and GPUs contributing.

AMD has continued to dig into Intel’s (INTC) market lead in the x86 CPU side of their business. Last quarter, AMD’s market share increased to 30.3%, versus 69.7% for Intel, on units shipped. This marks the first time that AMD had over a 30% market share for overall CPU sales. Further out, strong server demand is becoming increasingly important not only for revenue growth but also for profitability, with management indicating that the server business is increasingly accretive to AMD's overall gross margin.

The GPU business could also provide some added dimension to the earnings report. Demand for AMD's Instinct accelerators remains strong, and the MI355X is being adopted more widely across AI training and inference. Clarity on its market share against GPU leader Nvidia (NVDA) will also be scrutinized. Investors will also be looking to the next stage for AI chips with its MI450 and the Helios rack-scale platform.

The option market is pricing in a potential +/- $51 or 10.7% move into this Friday’s Nov 6 weekly expiry. Not surprisingly, volatility is elevated going into the report. Intel triggered a severe sector-wide drop, post earnings, after issuing a disappointing fourth-quarter outlook last Thursday after the close. Intel shares crashed nearly 29% on Friday, pulling down CPU rivals like AMD.

AMD enters earnings on a significant pullback, but the bar is still high this quarter. A strong quarter combined with upbeat Data Center and Q4 guidance may reinforce the bull case that AMD is becoming a much larger force in AI infrastructure. The key question may be whether the pace of GPU sales and server CPU growth is strong enough to keep exceeding increasingly lofty expectations.