AMD’s Data Center Business Moves to a Higher Growth Tier, but Valuation and MI450 Margin Pressure Support a Neutral Rating

Overview

AMD’s 2Q26 revenue and income statement metrics broadly exceeded expectations, with data center revenue more than doubling, driven by EPYC processors and Instinct accelerators. The 3Q revenue guide was above consensus but slightly below some buy-side expectations, while the gross margin guide was especially conservative. More importantly, management’s comments on CY27 data center growth significantly raised medium-term earnings expectations. JPMorgan therefore lifted its forward forecasts and raised the target price to $550, but believes the current valuation already fairly fully reflects the multi-year AI opportunity and maintains a Neutral rating.

Core views

The core logic is that continued share gains in server CPUs, the ramp of MI450 rack-level products, and expansion of the AI customer base will drive data center revenue in CY27 to grow significantly faster than overall AI infrastructure spending. At the same time, the initial MI450 product mix may dilute gross margins, and the first rack-level system ramp carries substantial execution risk; soft client demand, weakness in gaming, and future warrant dilution will also offset part of the growth benefits. AMD’s medium-term earnings power is clearly moving higher, but the risk-reward at the current share price is not compelling.

Analysis framework

The report updates earnings forecasts by combining 2Q26 actual results, 3Q26 management guidance, revenue momentum by segment, supply and product ramp cadence, and customer demand feedback. It sets the target price by applying comparable-company forward P/E multiples to annualized 2H27 EPS, while also assessing product mix, competitive dynamics, and execution risk.

Methodology notes

• Valuation methodsComparable-company P/E method

  Forward P/E valuation

  Using a comparable-company P/E range of 30x to 33x, with a midpoint of 32x, multiplied by 2H27 annualized EPS of $17.20, resulting in a Dec-27 target price of $550.

• Earnings forecastSegment-driven model

  Forecasting revenue and margins by business segment

  The model separately evaluates growth, supply ramp, and product mix changes in data center CPUs, DC GPUs, client, gaming, and embedded businesses, then aggregates them into revenue, gross margin, and EPS forecasts.

• Earnings analysisActual-versus-expectations comparison

  Analysis of earnings beats and guidance differences

  The report compares 2Q26 actual results and 3Q26 guidance with consensus and buy-side expectations to identify stronger-than-expected data center growth and gross margin below elevated expectations.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• AMD.US

  Core research subject and beneficiary of AI data center, server CPU, and GPU growth

  Strengths

  EPYC and Instinct demand is strong, with data center revenue more than doubling; MI450 customer demand is ahead of initial forecasts; the embedded business has returned to double-digit growth.

  Weaknesses

  The DC GPU product mix dilutes gross margins, R&D investment needs are high, gaming is weighed down by the console cycle, and current valuation is elevated.

  Comparison

  The server CPU business competes with Intel, while the GPU and AI accelerator business competes with NVIDIA; 2Q server CPU sequential growth was below Intel’s, but the report believes this was mainly due to a one-off impact from Intel Granite Rapids concentrated shipments.

  Risks

  Failure to ramp rack-level products, market share below expectations, weaker PC demand, supply constraints, gross margin pressure, and potential dilution from OpenAI / Meta warrants.

• META.US

  Initial core MI450 customer and AI infrastructure ecosystem partner

  Strengths

  As one of MI450’s anchor customers, its demand helps validate AMD’s rack-level AI platform and drive scaled deployment.

  Weaknesses

  The report does not analyze META’s own earnings or valuation.

  Comparison

  META, together with OpenAI and Anthropic, forms the early core customer group for MI450, and the partner list continues to expand.

  Risks

  If AMD’s product deployment cadence, system performance, or supply falls short of expectations, related AI infrastructure delivery could be affected; related warrants may also dilute AMD shareholders’ equity.

Key data

• 2Q26 revenue$11.5BUp 50% year over year and 13% quarter over quarter, above consensus expectations of $11.31B.
• 2Q26 data center revenue$6.72BUp 107% year over year and 16% quarter over quarter, the main driver of the earnings beat.
• 2Q26 DC GPU revenueApproximately $2.8BJPMorgan estimate, up about 190% year over year and about 17% quarter over quarter, driven by MI350 adoption.
• 2Q26 gross margin56%Up about 70 basis points quarter over quarter, supported by improved data center business mix.
• 3Q26 revenue guidance$13.0BUp 41% year over year and 13% quarter over quarter, above consensus expectations of $12.5B.
• 3Q26 gross margin guidanceApproximately 56%Expected to be flat quarter over quarter, slightly below consensus expectations of 56.2%.
• CY27 server CPU growth frameworkMore than 70% year-over-year growthContinued growth off a higher revenue base, with ongoing year-over-year share gains expected over the medium term.
• CY27 data center revenue growth frameworkWell over 100% year-over-year growthDriven jointly by server CPU acceleration and significant Helios / MI450 ramp.
• 2Q26 free cash flow$1.6BCapex rose from $389M in 1Q26 to $808M in the same period, partly to support OSAT equipment for the Venice ramp.
• Adjusted EPS forecastFY26E $7.25; FY27E $14.38; FY28E $21.80FY27 and FY28 EPS are expected to grow 98.4% and 51.6%, respectively.
• Target price$550Target period is Dec-27; previous target price was $385 for Dec-26.

Impact & implications

The results and management outlook reinforce AMD’s medium-term growth case as a key beneficiary of AI compute and server CPUs, especially as CY27 data center revenue may enter a nonlinear growth phase. However, DC GPUs will still dilute gross margins during the high-growth period, and the execution difficulty of moving rack-level systems from delivery to scaled deployment is higher than for single-chip products. The target price increase mainly reflects a stronger data center framework and a shift in the valuation horizon, not a clear improvement in near-term risk-reward.

Risks

• AMD’s first rack-level AI system ramp carries significant design, supply, integration, and customer deployment risks.
• A higher MI450 mix may create more visible product-mix dilution to gross margins from 4Q26 to 1H27.
• The current share price already fairly fully reflects multi-year growth opportunities, leaving limited potential upside to the target price.
• Competition in server CPUs with Intel and in GPUs with NVIDIA could lead to market share and pricing below expectations.
• PC end demand is sensitive to the macro environment, and weaker client markets in 2H26 could pressure revenue and profits.
• Gaming revenue is expected to decline significantly in CY26 and may remain low in CY27 due to late-cycle console effects.
• Continued increases in R&D and other operating expenses to catch up with industry leaders may limit operating leverage.
• OpenAI- and Meta-related warrants are expected to begin having a dilutive impact from 2H27.
• Delays in supply expansion required for Venice, Helios, and MI450 could affect the realization of CY27 growth.

What to watch

• Initial Helios / MI450 shipments at the end of 3Q and the pace of scale ramp in 4Q26 and 1H27.
• Whether the MI450 customer base can continue expanding and whether customer pull-ins continue to run ahead of initial forecasts.
• The actual extent of gross margin dilution from the rising data center GPU mix.
• Changes in AMD’s market share relative to Intel after new server CPU supply comes online.
• Progress in Venice volume production and whether OSAT equipment investment can translate into sufficient supply.
• Whether data center and embedded businesses can deliver the strong double-digit sequential growth implied by management for 3Q26.
• 4Q26 client demand, mobile CPU seasonality, and pass-through of memory and component costs.
• Whether the gaming business can move off low levels in CY27, and the sustainability of double-digit growth in the embedded business.
• The specific dilutive impact of OpenAI / Meta warrants on EPS and share count from 2H27 onward.