Here’s Why AMD Shares Crashed 7% After Its Q3 2024 Earnings

TradingKey - In the world of technology and investing, Artificial Intelligence (AI) is all the rage right now. That’s been mainly down the remarkable demand for computing power required to process the large language models (LLMs).

One of the hottest sectors that has seen an immediate benefit to this AI revolution is semiconductors. Advanced Micro Devices Inc (NASDAQ: AMD), otherwise known as “AMD”, is seen as one of the big chip players that could benefit from the AI revolution given it’s the second-largest vendor of data centre graphics processing units (GPUs) that are critical to training LLMs.

The semiconductor designer had high expectations from the market heading into its Q3 2024 earnings release, with the company reporting its numbers on Tuesday (29 October) after the market closed. 

Unfortunately for shareholders, AMD’s share price fell 7% in after-hours trading following the release. Here’s why that was the case.

Revenue in line but weak guidance for Q4 2024

AMD delivered revenue in Q3 2024 of US$6.82 billion, an increase of 18% year-on-year from the year-ago period. That was slightly ahead of the market’s expectations and was towards the higher end of the previously-guided range from AMD’s management.

However, what caused the market’s disappointment was relatively tepid guidance for Q4 2024 revenue from management. AMD said it expects to post Q4 2024 revenue of around US$7.5 billion and this would represent a 22% year-on-year increase.

That projected growth was less than what the market was hoping for given the high expectations surrounding AMD’s AI-related business lines.  

During the earnings call, CEO Lisa Su said that customer and partner interest for its new AI chip (MI235X) was high and that production shiopments were planned to start in the current quarter. AMD also stated that it expects US$5 billion in AI chip sales for 2024, up from its previous full-year forecast of US$4.5 billion.

Data centre revenue growth still strong

AMD’s data centre segment posted record revenue for Q3 2024, notching up US$3.5 billion in sales – a 122% year-on-year increase from the same quarter in 2023. It was also a 25% quarter-on-quarter rise from the data centre revenue AMD recorded in Q2 2024.

The company said this growth was driven primarily by the strong ramp up in its AMD Instinct GPU shipments and growth in its AMD EPYC CPU sales.

In AMD’s client segment, which includes its PC-related chips, the company saw revenue of US$1.9 billion for Q3 2024 – up 29% year-on-year and up 26% quarter-om-quarter. AMD revealed that it has partnered with Microsoft Corporation (NASDAQ: MSFT) and that AMD CPU-powered AI PCs will have Copilot+ enabled on them, with planned free upgrades due to start in November 2024.

Weaker sales in other business segments

The shine was taken off AMD’s data centre and client segments by weak performance in its gaming segment, which saw revenue fall 69% year-on-year to US$462 million in Q3 2024. That was down to a decrease in “semi-custom revenue” that includes custom chips for big game consoles like the PlayStation 5.

Meanwhile, revenue from AMD’s embedded segment – that includes less advanced and expensive chips for industry and other applications – fell 25% year-on-year to US$927 million as customers normalised their inventory levels, although quarter-on-quarter revenue was up 8% as demand improved in several of its end markets. 

Investors will likely have to hear more positive developments from AMD on demand for chips in its data centre and client segments for the share price to climb further in the coming quarters. That’s because its year-to-date gain of around 20% (pre-results) is still far behind Nvidia Corp’s (NASDAQ: NVDA) 193% rise during the same period.