Advanced Micro Devices Inc. disappointed investors with tepid sales forecasts today, and its stock headed south during the extended trading session.

The company’s stock was down more than 7% after the close, despite strong third-quarter earnings that met expectations and revenue that beat those.

AMD reported profit before certain costs such as stock compensation of 92 cents per share, in line with Wall Street forecasts. Revenue for the period rose 18% from a year earlier to $6.82 billion, above the Street consensus estimate of $6.71 billion.

The company said its data center business managed to double revenue for the second consecutive quarter, but its forecast for the fourth quarter fell slightly short of analyst consensus. For the fourth quarter, AMD said it was targeting revenue of $7.5 billion, roughly $300 million, below Street forecasts of $7.54 billion. This would represent a decline of 22% compared to the fourth quarter of fiscal 2023.

Despite this, the company is becoming more and more profitable. AMD reported net income of $771 million at the end of the third quarter, compared to a profit of just $299 million a year earlier.

Analyzing the numbers, it was AMD’s data center segment that once again posted the most impressive numbers, with sales more than doubling from the previous year to 3.5 billion dollars. In a conference call, AMD Chairman and CEO Lisa Su (pictured) said data center growth was driven by strong sales of the company’s products. Instinct brand graphics processing unitswhich offer an alternative to Nvidia Corp.’s GPUs. for businesses looking to run artificial intelligence workloads.

In total, data center revenue increased 122% from the previous year, and Su said there will be more as the company continues to see strong demand from data center providers. cloud infrastructures and other companies looking to expand their AI infrastructure.

AMD also sells central processing units for personal computers, laptops and servers, and this segment of its business, the client division, saw sales increase 23% to $1.9 billion. During the conference call, Su said AMD’s processors power a number of new high-end laptops that have been dubbed “Copilot+” devices because they have been customized to run advanced AI models built into the system Windows operating system from Microsoft Corp.

Since the data center segment contributed more to the company’s total revenue, AMD was able to increase its gross margin to 54%, beating Street expectations.

AMD also operates a gaming business that makes chips for video game consoles and graphics cards for PCs, but the quarter was disappointing, with sales down 68% from a year earlier. According to Su, this is the result of a decline in “semi-custom revenue”, linked to sales of chips for consoles such as the PlayStation 5 and Microsoft Xbox.

As for AMD’s embedded business, which sells low-power chips for industrial and automotive applications, its revenue fell 25% to $927 million.

Lucas Keh, an analyst at Third Bridge, said the stock’s after-hours decline suggests investors were hoping the data center segment would deliver even greater growth than materialized, although they may also be concerned about the weakness of AMD’s client and embedded segments.

Although AMD stock is heading in the wrong direction today, it is still up more than 20% year to date. However, the company may be concerned that rivals such as Nvidia and Broadcom Inc. have posted much bigger gains during the same period, benefiting from insatiable corporate demand for AI chips.

AMD might have hoped for better, since it is the world’s second-largest GPU supplier after Nvidia, but it still has reason to be optimistic about its long-term prospects. During the quarter, it announced the next generation of its Instinct AI acceleratorthe MI325X chip, as well as a new network platform based on the AMD Pensando Salina data processing unit. According to the company, the MI325X accelerator delivers 1.3 times the performance of Nvidia’s most powerful alternative, the H200 GPU, with 1.8 times the capacity and 1.3 times the bandwidth.

The chipmaker has remained tight-lipped about its expectations for the MI325X accelerator. But it cites third-party data that projects the AI ​​GPU market will reach more than $500 billion by 2028, suggesting there is huge room for growth if AMD can take more market share away from Nvidia .

Currently, the company controls only a small fraction of this market. During the conference call, Jean Hu, AMD’s executive vice president, treasurer and chief financial officer, said the company expects to generate $5 billion in AI chip sales this year, up from $4.5 billion dollars in 2023.

“Customer and partner interest in the MI325X is high,” Su said when asked about its prospects. “Production deliveries are expected to begin this quarter.”

Keh said GPU sales will continue to be the main driver of AMD’s growth in the future, and while it remains “number two” in the AI ​​accelerator market, it can benefit from Nvidia’s delays to market its next-generation Blackwell GPUs.

“AMD has a good opportunity to gain additional share from Nvidia with its 325x and 350 Instinct products amid Blackwell’s current lag issues,” he said.

Photo: Robert Hof/SiliconANGLE