AMD's segment performance

Data source: Advanced Micro Devices. YOY = year over year. QOQ = quarter over quarter.

The data center's revenue marked a fourth consecutive quarterly high, driven largely by the strong ramp up in production and shipments of Instinct MI300 GPUs. AMD introduced the Instinct series in the fourth quarter of 2023 to compete with Nvidia's data center GPUs, which dominate the data center AI chip market. An increase in EPYC central processing unit (CPU) sales also contributed to the segment's growth.

The client segment's year-over-year and sequential growth was primarily driven by sales of Ryzen processors. This segment sells chips for personal computers (PCs).

The gaming segment continues to struggle, largely because of a decrease in semi-custom revenue, which is revenue from sales of processors for consoles.

The embedded segment's year-over-year revenue declined but its sequential revenue rose. The decline is due to customers who are continuing to normalize their inventory levels following slowdowns in some end markets, notably auto and industrial. The sequential rise is due to an improving demand environment for some end markets.

AMD's fourth-quarter guidance

For Q4, management guided for:

• Revenue of $7.5 billion, which equates to growth of 22% year over year and growth of 10% sequentially.

• Adjusted gross margin of 54%. For context, this metric was 54% in the just-reported third quarter.

Going into the report, Wall Street had been modeling for Q4 revenue of $7.54 billion, so AMD's outlook fell just a bit short of this estimate.

A good overall report

AMD turned in a good third-quarter report. It's a particularly positive sign that adjusted EPS growth was notably stronger than revenue growth, reflecting an expanding profit margin.

Third-quarter revenue and margin guidance were solid, even if the revenue outlook was a tad lower than Wall Street had expected.

The after-hours stock sell-off might seem an overreaction to some investors since AMD's Q4 revenue guidance was just a little lighter than Wall Street had expected. However, this dynamic is explainable in the context of AMD stock's recent run-up. Over the one-year period through Tuesday's regular trading session, AMD stock rose 72%, outperforming the S&P 500's 42% return. Given this strong performance, investors have high expectations.

A stock worth a place on your watchlist

Reiterating my closing after AMD's last quarterly report:

Nvidia stock remains my favorite AI stock, but the AI chip and related technology space is growing so rapidly that there is room for more than one big winner. AMD's results since launching its Instinct GPUs late last year are very promising.

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Beth McKenna has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.

AMD Stock Drops Nearly 8% on Guidance Letdown, but It Raises 2024 Artificial Intelligence (AI) Chip Sales Outlook was originally published by The Motley Fool