AMD Q2 Deep Dive: Data Center Growth and AI Transition Offset by Margin Pressures

Computer processor maker AMD (NASDAQ:AMD) reported Q2 CY2025 results beating Wall Street’s revenue expectations, with sales up 31.7% year on year to $7.69 billion. On top of that, next quarter’s revenue guidance ($8.7 billion at the midpoint) was surprisingly good and 5.1% above what analysts were expecting. Its non-GAAP profit of $0.48 per share was in line with analysts’ consensus estimates.

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StockStory’s Take

AMD’s second quarter results were met with a significant negative market reaction, reflecting investor concerns despite management highlighting strong performance in several core areas. The company pointed to record sales of its EPYC and Ryzen processors, with CEO Lisa Su noting, “We set records for both EPYC and Ryzen CPU sales, reflecting the broad-based demand for our differentiated high-performance data center, PC and embedded processors.” However, the quarter was also marked by a substantial inventory write-down related to U.S. export controls, which impacted gross margins and contributed to a negative operating margin.

Looking ahead, AMD’s guidance is shaped by expectations for continued demand in its data center and AI segments, particularly as the MI350 series accelerators ramp up and new product launches gain traction. Management believes that the ramp of MI355 GPUs and sustained momentum in EPYC and Ryzen CPUs will drive revenue growth, while the company remains cautious about the timing and scale of contributions from China due to ongoing license reviews. CFO Jean Hu emphasized, "Our objective is to continue to improve gross margin. Despite MI350 very strong ramp in Q3, we are able to continue to drive the margin up."

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to strong execution in client and data center CPUs, offset by regulatory headwinds and a shift in product mix, with AI and export controls featuring prominently in management’s analysis.

• AI and Data Center Transition: AMD experienced robust demand for its EPYC CPUs, driven by cloud and enterprise workloads as well as emerging AI use cases. The ramp of fifth-generation EPYC Turin processors and sustained demand for prior generations fueled share gains, but data center GPU revenue was hindered by export restrictions on MI308 accelerators to China.
• Inventory Write-Down Impact: The $800 million inventory write-down related to MI308 export controls weighed heavily on gross margins and operating results, with most affected inventory in work-in-process rather than finished goods. Management indicated that it could take several quarters to work through this inventory, depending on license approvals.
• Client and Gaming Momentum: The client and gaming segments posted record revenue, led by strong desktop CPU sales and high demand for Ryzen 9000 series and X3D processors. Gaming revenue was bolstered by normalized console inventories and new collaborations with Microsoft and Sony for next-generation hardware.
• Shift in Product Mix and Pricing: AMD’s results benefited from a richer product mix, as sales of higher-end CPUs and premium notebook components increased. Management highlighted that uplift in revenue stemmed from average selling price growth, especially as enterprise adoption of Ryzen CPUs expanded.
• Embedded Segment Recovery: The embedded segment saw a modest year-over-year decline, with gradual recovery in demand across test and measurement, communications, and aerospace markets. Management noted ongoing design win momentum, particularly in adaptive SoCs for automotive and robotics applications.

Drivers of Future Performance

AMD’s outlook is anchored by the ramp of its AI accelerators and continued strength in client and data center CPUs, though export controls and product mix remain key considerations.

• AI Accelerator Ramp: Management expects the MI350 and MI355 GPU families to drive double-digit revenue growth in the data center segment, with customer adoption outpacing initial expectations. The company is preparing for large-scale deployments and significant contributions from both hyperscalers and sovereign cloud projects in 2026.
• Gross Margin Management: Despite ongoing margin dilution from data center GPUs, AMD aims to maintain non-GAAP gross margin around 54%, supported by operational efficiencies and a richer mix of high-margin server and commercial PC products. CFO Jean Hu cited ongoing improvements in operational execution as a key margin lever.
• Export Control Risks: The timing and magnitude of MI308 GPU shipments to China remain uncertain, as license reviews are ongoing. Management cautioned that revenue contributions from this region will depend on regulatory approvals and supply chain readiness, impacting near-term outlook and inventory recovery.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will watch (1) the production and adoption ramp of MI350 and MI355 GPUs across hyperscaler and sovereign customers, (2) the recovery trajectory of the embedded segment as demand stabilizes in key industrial and communications markets, and (3) regulatory developments impacting export licenses for MI308 shipments to China. Ongoing expansion in commercial PC and server CPU adoption will also be important to monitor.

AMD currently trades at $174.63, in line with $174.42 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free).

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