After the Supermicro financial report plummeted, "AI servers" are really not profitable?

The AI sector, which has been thriving, has received some bad news again, this time involving AMD.

On Tuesday, server manufacturer AMD released its fourth-quarter financial report, which was a mixed bag - revenue exceeded expectations, but gross margin declined, and EPS fell short of expectations. Specifically:

Revenue: Q4 revenue was $5.31 billion, a staggering 143.6% increase year-on-year;

EPS: Q4 EPS was $6.25, a 78.1% increase year-on-year, falling short of the expected $8.14;

Gross Margin: Q4 gross margin was 11.2%, a 5.8 percentage point decrease year-on-year.

Although revenue exceeded expectations, the lower-than-expected EPS and declining gross margin caused AMD's stock price to initially surge after hours, then plummet by over 10%.

AMD Enters the AI Battlefield with AI Servers, but Fails to Meet Expectations

As a manufacturer of AI servers, AMD has also benefited from the artificial intelligence boom in the past two years. Since the beginning of this year, with the increasing demand for AI servers, the company's stock price has doubled and has been included in the S&P 500 and Nasdaq 100 indices. Furthermore, in AMD's performance outlook on Tuesday, the company expects its revenue to reach $26 to $30 billion in the fiscal year ending June 30, 2025. Analysts' average estimate is $23.6 billion.

Although the revenue outlook is optimistic, what really worries Wall Street is its long-term profitability.

In the fierce price war with server suppliers such as Dell and HP, AMD's profit margin in Q4 dropped by 580 basis points year-on-year (430 basis points quarter-on-quarter), standing at only 11.3%.

AMD's executives stated after the performance release that due to business with major customers and increased investment in the new liquid-cooled server supply chain, the gross margin was negatively impacted, as major customers typically receive discounted prices through large orders. The company aims to achieve a gross margin target range of 14% to 17% by expanding new product and manufacturing supply chains in Taiwan and Malaysia.

However, Wall Street remains skeptical, with analysts pointing out that AMD failed to meet its profit targets in the last quarter, which is likely to exacerbate concerns about its profitability. This is a key reason for AMD's significant post-market decline.

Lack of Profitability Seems to be a "Common Problem" for AI Server Manufacturers

Not only AMD, but competitors in the server business such as HP and Dell also face profitability issues.

When Dell announced its first-quarter financial report at the end of May, the company projected a nearly 150 basis point decline in adjusted gross margin for the 2025 fiscal year, with an adjusted EPS of $1.55 to $1.75, far below analysts' expected $1.84Dell's management predicts that the high cost investment in its AI server business will drag down the full-year gross margin, putting pressure on profits and failing to meet high external expectations.

HP's gross margin in the second quarter was 33%, a year-on-year decrease of 3 percentage points and a quarter-on-quarter decrease of 3.4 percentage points.

The decline in gross margins of AI server suppliers such as AMD, Dell, and HP also reflects the increased investment by these hardware giants to compete in the AI server market, as well as the intense price wars between them. However, their management generally remains optimistic about the future of the AI business.

Charles Liang, CEO of Super Micro Computer, also stated on Tuesday: "We are ready to become the largest IT infrastructure company."