AMD drops 6.8% on cash flow drop, investors bet on AI rebound

Advanced Micro Devices fell 6.8% on Tuesday after reporting a drop in free cash flow, even though revenue and earnings surged in the second quarter. The chipmaker closed at $483.36, down from $518.58 the day before its earnings release. Shares are still up from a July 29 low of $429.56, but some investors see even more upside—potentially 25%—if the company’s cash generation recovers.

The dip came despite a strong quarter. AMD’s Q2 revenue rose 50% year over year, and net income jumped 163%, beating analyst expectations. But investors focused on free cash flow, which fell from $2.57 billion in Q1 to $1.56 billion in Q2—a drop of $1 billion. The decline was driven by higher capital spending for AI infrastructure and a $589 million drop in operating cash flow, mainly due to increased working capital needs like inventory and receivables. The free cash flow margin shrank from 25% to 13.5%, fueling concerns that heavy AI investments are squeezing short-term cash generation.

Yet many value investors see opportunity. A 10% out-of-the-money short put play on AMD now yields 3.5% over one month, suggesting the market may be overreacting. Analysts expect revenue to nearly double over the next two years, from $50.8 billion in 2024 to $87.5 billion in 2026. Even with a lower cash flow margin, free cash flow could still rise sharply if revenue growth outpaces spending. For example, if AMD maintains an 18% margin, free cash flow could reach $12.4 billion over the next 12 months, up from $8.4 billion in the trailing year.

The disconnect between earnings and cash flow may be temporary. While AI-driven capex is high now, it’s expected to fuel long-term growth. If AMD can scale its data center business without further margin erosion, its stock could rebound strongly. Analyst price targets already suggest significant upside, and a recovery in free cash flow would likely restore investor confidence. For now, the pullback looks like a buying opportunity for those betting on AMD’s AI-driven expansion.