Morgan Stanley: AMD server CPU growth forecast raised, AI expansion costs constrain valuation

How does the data center business offset PC weakness?

AMD reported 2026 third-quarter revenue of 13.377 billion dollars, up 44.7% year over year and above the market consensus of 13.096 billion dollars; data center revenue was 8.546 billion dollars, up 96.9% year over year, and was the main growth engine.
Client revenue for the same period was 2.949 billion dollars, down 3.7% sequentially. Morgan Stanley expects fourth-quarter client revenue to fall another 23% sequentially, about 400 million dollars below its previously lowered forecast.
Despite pressure on PCs, the midpoint of AMD’s fourth-quarter revenue guidance reached 17 billion dollars, up 27.1% from the third quarter and above the market consensus of 16.287 billion dollars; non-GAAP gross margin guidance was approximately 55%, below the third quarter’s 55.9%.

AMD raised its 2027 server CPU revenue growth outlook from 70% to more than 100%. Morgan Stanley consequently raised its overall company forecast, projecting 2027 revenue of 98.941 billion dollars, up from its previous forecast of 89.13 billion dollars; its non-GAAP earnings-per-share forecast rose from 15.64 dollars to 18.77 dollars.
In the first three quarters of 2026, AMD’s server CPU shipments grew approximately 50% year over year and revenue grew approximately 90%; Intel’s shipments grew 4% over the same period. Morgan Stanley believes AMD’s fully outsourced supply chain responds better to a tight market, supporting continued share gains.
The bank expects AMD to account for more than sixty percent of the combined shipment increase of the two companies in 2027, but remains cautious about extrapolating current growth conditions over the long term: it is uncertain how long the server CPU shortage will last.

Helios generated its first revenue in the third quarter. AMD said its major customers’ demand for 2027 was strong, its internal forecast was higher than it had been 90 days earlier, and progress had been made in running production workloads; Morgan Stanley raised its 2027 GPU revenue forecast from 38 billion dollars to 40 billion dollars.
Winning customers also came at a cost: Morgan Stanley noted that the impact of warrants had begun to be recognized in results, with a related accounting charge of 1.1 billion dollars in the quarter, substantial relative to quarterly GPU revenue of approximately 3.5 billion dollars. The bank believes such costs should be reflected in valuation multiples.

Morgan Stanley raised its price target from 510 dollars to 550 dollars but maintained its Equal-weight rating. The bank raised its 2028 ModelWare earnings-per-share forecast while lowering its valuation multiple from approximately 22 times to approximately 20 times, partly because of growing concerns that the CPU cycle is near its peak.
The bank expects GPUs to account for 42% and 46% of AMD’s revenue in 2027 and 2028, respectively; AMD’s approximately 20-times 2028 price-to-earnings ratio remains above the approximately 10-times level of large AI chip peers. Morgan Stanley recognizes the server CPU opportunity and long-term AI growth potential but considers the current valuation gap too wide.