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AMD's Gross Margin to Contract Sequentially: Is Growth Getting Harder?
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Key Takeaways
AMD expects Q1 2026 gross margin to fall 200 bps to 55% as prior inventory benefits fade.
Lower China revenues and a 5% sequential sales drop weigh on AMD's margins amid seasonal softness.
AMD projects ~32% YoY Q1 revenue growth, led by Data Center, Client, and Gaming segments.
Advanced Micro Devices’ (AMD - Free Report) profit-generating ability is under challenge as the company expects the first-quarter 2026 gross margin to decline 200 basis points (bps) sequentially to 55%. AMD’s gross margin for the fourth quarter of 2025 benefited from an inventory reserve release tied to MI308, worth $360 million, which helped expand gross margin by 290 bps to 57%. The company stated that the inventory benefit from the fourth quarter will not repeat in the first quarter of 2026.
The company stated that fourth-quarter 2025 had approximately $390 million in MI308 revenues from China. AMD expects approximately $100 million in revenues from China in the first quarter of 2026, with no additional margin lift, as this was already reflected in the fourth quarter. Hence, the first quarter does not benefit from the same margin tailwind despite some China sales. First-quarter 2026 gross margin remains under pressure from a projected 5% sequential revenue decline, primarily due to seasonally depressing client and gaming revenues.
AMD expects first-quarter 2026 revenues to be approximately $9.8 billion, plus or minus $300 million, which, at the mid-point, represents year-over-year growth of approximately 32%. The company expects year-over-year revenue growth to be driven by the Data Center, Client and Gaming segments, along with modest growth in the Embedded segment.
Strong top-line growth is expected to offset rising operating expenses in the first quarter of 2026. AMD expects non-GAAP operating expense to be $3.05 billion compared with $3 billion (up 42% year over year) in the fourth quarter of 2025. Operating income was a record $2.9 billion in the fourth quarter of 2025, representing a 28% operating margin, driven by a 300 bps expansion in Data Center operating margin. Strong top-line growth is expected to help drive operating margin in the first quarter of 2026.
AMD Faces Tough Competition
AMD is facing stiff competition from the likes of NVIDIA (NVDA - Free Report) and Broadcom (AVGO - Free Report) in the AI-driven data center space.
NVIDIA's AI Infrastructure business is accelerating rapidly and is expected to remain a key growth driver. The company’s growth is driven by a global transition to AI-powered computing, where demand is expanding across industries and geographies simultaneously. This is expected to drive gross margin. NVIDIA expects first-quarter 2027 non-GAAP gross margin to be in the range of 74.9-75% compared with 75.2% reported in the fourth quarter of 2026 and 61% registered in the first quarter of 2026.
Broadcom benefits from the AI semiconductor boom, strong custom XPU adoption, AI infrastructure buildout, massive backlog visibility, system-level sales expansion and infrastructure growth. AVGO expects gross margin to be down approximately 100 bps sequentially, primarily reflecting a higher mix of AI revenues. The company reported a non-GAAP gross margin of 78% approximately in the fourth quarter of 2025 compared with 76.9% approximately in the fourth quarter of 2024.
AMD shares have rallied 32.8% year to date, outperforming the broader Zacks Computer and Technology sector’s 5.4% increase.
AMD Stock’s Price Performance
Image Source: Zacks Investment Research
The AMD stock is trading at a premium, with a trailing 12-month price/book of 7.36X compared with the Zacks Computer Integrated Systems industry’s 5.93X. AMD has a Value Score of F.
AMD Stock Is Overvalued
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for first-quarter fiscal 2026 earnings is currently pegged at $1.28 per share, unchanged over the past 30 days, suggesting 33.3% growth from the year-ago quarter.
View the Zacks #1 Rank List
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AMD's Gross Margin to Contract Sequentially: Is Growth Getting Harder?
Key Takeaways
Advanced Micro Devices’ (AMD - Free Report) profit-generating ability is under challenge as the company expects the first-quarter 2026 gross margin to decline 200 basis points (bps) sequentially to 55%. AMD’s gross margin for the fourth quarter of 2025 benefited from an inventory reserve release tied to MI308, worth $360 million, which helped expand gross margin by 290 bps to 57%. The company stated that the inventory benefit from the fourth quarter will not repeat in the first quarter of 2026.
The company stated that fourth-quarter 2025 had approximately $390 million in MI308 revenues from China. AMD expects approximately $100 million in revenues from China in the first quarter of 2026, with no additional margin lift, as this was already reflected in the fourth quarter. Hence, the first quarter does not benefit from the same margin tailwind despite some China sales. First-quarter 2026 gross margin remains under pressure from a projected 5% sequential revenue decline, primarily due to seasonally depressing client and gaming revenues.
AMD expects first-quarter 2026 revenues to be approximately $9.8 billion, plus or minus $300 million, which, at the mid-point, represents year-over-year growth of approximately 32%. The company expects year-over-year revenue growth to be driven by the Data Center, Client and Gaming segments, along with modest growth in the Embedded segment.
Strong top-line growth is expected to offset rising operating expenses in the first quarter of 2026. AMD expects non-GAAP operating expense to be $3.05 billion compared with $3 billion (up 42% year over year) in the fourth quarter of 2025. Operating income was a record $2.9 billion in the fourth quarter of 2025, representing a 28% operating margin, driven by a 300 bps expansion in Data Center operating margin. Strong top-line growth is expected to help drive operating margin in the first quarter of 2026.
AMD Faces Tough Competition
AMD is facing stiff competition from the likes of NVIDIA (NVDA - Free Report) and Broadcom (AVGO - Free Report) in the AI-driven data center space.
NVIDIA's AI Infrastructure business is accelerating rapidly and is expected to remain a key growth driver. The company’s growth is driven by a global transition to AI-powered computing, where demand is expanding across industries and geographies simultaneously. This is expected to drive gross margin. NVIDIA expects first-quarter 2027 non-GAAP gross margin to be in the range of 74.9-75% compared with 75.2% reported in the fourth quarter of 2026 and 61% registered in the first quarter of 2026.
Broadcom benefits from the AI semiconductor boom, strong custom XPU adoption, AI infrastructure buildout, massive backlog visibility, system-level sales expansion and infrastructure growth. AVGO expects gross margin to be down approximately 100 bps sequentially, primarily reflecting a higher mix of AI revenues. The company reported a non-GAAP gross margin of 78% approximately in the fourth quarter of 2025 compared with 76.9% approximately in the fourth quarter of 2024.
AMD Share Price Performance, Valuation & Estimates
AMD shares have rallied 32.8% year to date, outperforming the broader Zacks Computer and Technology sector’s 5.4% increase.
AMD Stock’s Price Performance
Image Source: Zacks Investment Research
The AMD stock is trading at a premium, with a trailing 12-month price/book of 7.36X compared with the Zacks Computer Integrated Systems industry’s 5.93X. AMD has a Value Score of F.
AMD Stock Is Overvalued
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for first-quarter fiscal 2026 earnings is currently pegged at $1.28 per share, unchanged over the past 30 days, suggesting 33.3% growth from the year-ago quarter.
Advanced Micro Devices, Inc. Price and Consensus
Advanced Micro Devices, Inc. price-consensus-chart | Advanced Micro Devices, Inc. Quote
AMD currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.