Key Takeaways
- AMD beat third-quarter estimates as data center revenue climbed 97% to $8.5 billion, and it guided to about $17 billion of fourth-quarter revenue.
- The results also included a $1.1 billion charge for the penny-a-share warrants AMD gave OpenAI and Meta, and that charge grows as AMD’s stock rises and its chips ship.
- The charge doesn’t hit cash or adjusted earnings, but the dilution behind it is real, and free cash flow separately fell to about 4% of revenue as AMD built up inventory.
- AMD trades at 42x forward earnings, above its three-year average, so NVIDIA’s report later this month and AMD’s own fourth quarter are the next tests.
Advanced Micro Devices (AMD) beat Wall Street’s estimates after Tuesday’s close, with data center sales nearly doubling.
But the quarter also brought the first bill for the stock AMD promised OpenAI and Meta Platforms (META). Most of that bill comes from AMD’s own rally.
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What exactly happened
Here’s the quarter against Bloomberg’s consensus estimates:
- Revenue: $13.38 billion, against $13.08 billion expected
- Adjusted EPS: $2.09, against $1.97 expected
- Data center revenue: $8.5 billion, up 97% from a year earlier and ahead of the $8.19 billion estimate
- Fourth-quarter guidance: about $17 billion of revenue, plus or minus 3%
And CEO Lisa Su raised the stakes for next year on the call: “Based on our current visibility, we now expect revenue to grow more than 80% in 2027.”
The GAAP results also included a $1.1 billion charge, or $0.66 a share, for the warrants AMD granted OpenAI and Meta. Last quarter, that line was zero.
Under the deals, each company can buy up to 160 million AMD shares at a penny apiece as it rolls out up to 6 gigawatts of AMD chips. The last batch unlocks only if AMD’s stock reaches $600. AMD started booking the warrants once its MI450 chips began shipping. CFO Jean Hu said on the call that the charge mostly reflected “the increase in our share price and the changes in the estimated probability of meeting the warrant conditions.” AMD’s stock rose about 21% last quarter and closed it around $630, above that $600 line.
A bill that grows with the stock
The charge is also set to grow. Hu expects it “to increase as we and our customers progress under this agreement.” So every rally and every chip shipment to these two customers adds to it.
It won’t show up in adjusted earnings, though. Hu said the charges “will not affect our non-GAAP results or free cash flow.” Adjusted earnings are the figures analysts expected to climb steeply, nearly doubling this year and more than doubling again in 2027:
A $17 billion fourth-quarter guide is well above the roughly $16.2 billion that analysts’ full-year forecast implied going in. Nothing in this report makes me expect those estimates to come down.
Still, the warrants cost shareholders something real. Fully unlocked, the 320 million new shares would give OpenAI and Meta about 16% of the enlarged company for $3.2 million between them. At Tuesday’s close, those shares were worth about $155 billion. So AMD is paying for part of OpenAI’s and Meta’s business in its own stock. The charge stays out of adjusted EPS, but the shares will show up in the per-share math as they unlock.
On the plus side, the shares only unlock if both companies keep buying chips and the stock keeps climbing. That means the dilution arrives alongside the revenue that pays for it.
Where the cash went
Before this quarter, free cash flow had climbed for most of the last two years, peaking at $2.6 billion in the March 2026 quarter before slipping to $1.6 billion in June:
In the third quarter it dropped to $554 million, about 4% of revenue. According to Bloomberg, analysts had expected nearly $2 billion.
The warrants didn’t cause that drop. Inventory did: it jumped about $3 billion to a record $11.5 billion. Hu said the buildup was “to fulfill our strong data center demand,” and added: “We expect to continue to invest in inventory and capacity to support our strong growth in 2027.”
Debt also rose, to $7.1 billion from $3.2 billion, after a $4.75 billion bond sale in August. Cash and short-term investments of $15.8 billion still cover it comfortably. If demand cools, though, some of that inventory could have to be written down.
What’s next
Investors were already paying up for this growth before the report. AMD’s forward P/E stood at 42x, above its three-year average of 39x but well below June’s peak of 67x:
NVIDIA (NVDA) is the obvious yardstick. As Bloomberg’s Ryan Vlaselica said on Tuesday’s episode of the Bloomberg Tech podcast, ahead of the report: “AMD is a fairly expensive chip maker, especially relative to NVIDIA.”
NVIDIA’s own report later this month will show us how strong AI demand still is. AMD’s fourth quarter, expected in early February, will show whether that $11.5 billion of inventory turns into revenue and cash.
The way I see it, AMD will be glad to keep paying the warrant bill, since it only grows when the chips ship and the stock climbs. The cash worries me more. At 42x, investors are already paying for 2027, and they’ll want the cash to show up along with the revenue.
Of course, Hu plans to keep investing in inventory into 2027, so free cash flow could take a few quarters to recover.
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